Essays in financial regulation and corporate law

Abstract

In the first essay, we investigate which provisions, among a set of twenty-four governance provisions followed by the Investor Responsibility Research Center (IRRC), are correlated with firm value and stockholder returns. Based on this analysis, we put forward an entrenchment index based on six provisions - four "constitutional" provisions that prevent a majority of shareholders from having their way and two "takeover readiness" provisions that boards put in place to be ready for a hostile takeover. We find that increases in the level of this index are monotonically associated with economically significant reductions in firm valuation, as measured by Tobin's Q. We present suggestive evidence that the entrenching provisions cause lower firm valuation. We also find that firms with higher level of the entrenchment index were associated with large negative abnormal returns during the 1990-2003 period. Furthermore, we find that the provisions in our entrenchment index fully drive the correlation, identified by prior work, that the IRRC provisions in the aggregate have with reduced firm value and lower stock returns during the 1990s. We find no evidence that the other eighteen IRRC provisions are negatively correlated with either firm value or stock returns during the 1990-2003 period. The second essay investigates the effect the imposition of mandatory disclosure in 1964 on over-the-counter firms had on stock volatility, stock returns and stock synchronicity. This study finds that mandatory disclosure is associated with both a dramatic reduction in the volatility of OTC stock returns and with OTC stocks enjoying positive abnormal returns.

(cont.) The third essay investigates whether the empirical evidence favors state competition for corporate incorporations. The essay concludes that the existing empirical evidence does not favor state competition. Moreover, data on incorporation choices made by firms supports this conclusion. States with wealth-reducing state antitakeover statutes are not penalized in the market for incorporations. The fourth essay addresses whether dispersion of ownership in the United States can be explained by the U.S. having a strong corporate and securities legal regime. The essay concludes that dispersion of ownership cannot be so explained.