Martin Gelter Risk?shifting through Issuer Liability and Corporate Monitoring (01 Oct 2013) Available at ECGI: http://ecgi.global/working-paper/riskshifting-through-issuer-liability-and-corporate-monitoring
This article explores how issuer liability reallocates fraud risk and how risk allocation may reduce the incidence of fraud. In the US, the apparent absence of individual liability of officeholders and insufficient monitoring by insurers undermines the potential deterrent effect of securities litigation.
The underlying reasons why both mechanisms remain ineffective are collective action problems under the prevailing dispersed ownership structure, which eliminates the incentives to monitor set by issuer liability. This article suggests that issuer liability could potentially have a stronger deterrent effect when it shifts risk to individuals or entities holding a larger financial stake. Thus, it would enlist large shareholders in monitoring in much of Europe. The same riskshifting effect also has implications for the debate about the relationship between securities litigation and creditor interests. Creditors? claims should not be given precedence over claims of defrauded investors (e.g. because of the capital maintenance principle), since bearing some of the fraud risk will more strongly incentivize large creditors, such as banks to monitor the firm in jurisdictions where corporate debt is relatively concentrated.
This paper uses the staggered adoption of the Sarbanes-Oxley Act of 2002 for a difference-in-difference identification of the impact of corporate governance on hedging. In a large panel of listed US firms, we focus on two indexes of the legally...Read more
The regulation of related party transactions (RPTs) is today the single most important yardstick for the quality of corporate governance systems. It is also one of the thorniest issues because RPTs are a well-documented cause of abuse by...Read more
In response to the financial crisis, as a way to align incentives of originators and investors, new regulation in the US (Dodd-Frank) and the EU (CRR) requires issuers of asset backed securities to hold some skin-in-the-game, offering a set of...Read more
Codes of conduct are a well-accepted feature of European corporate governance. Listed corporations are obliged to annually state their compliance with a corporate governance code or to explain their non-compliance. Whilst it is agreed that...Read more