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As a professor, I love it when academic research is front-page news!  So, I was delighted yesterday to see a piece there in the Financial Times, Academics accuse Morningstar of misclassifying bond funds (here – subscription required), on Huaizhi Chen, Lauren Cohen, and Umit G. Gurun’s recently posted SSRN article: Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds (here). 

The gist of the article is that in deriving its risk classifications/ratings for bond funds, Morningstar’s rating system relies upon self-reported, summary data – often misreported – from bond mutual fund managers about the percentages of funds’ assets in different risk categories (AAA, AAA, B, etc.) rather than using it to supplement the data that those same funds file quarterly with the SEC.  The authors explain that assets in equity funds are generally of the same security type (for example, common stock), but that this isn’t true in the case of bond funds, which are “more bespoke and unique” with differences “in yield, duration, covenants, etc. – even across issues of the same underlying firm.” (p.2)  And while equity might have about 100 positions, bond funds generally have more than 600 issues. (p.2)  So…

In recent years, there has been a lot of discussion over the problem of “common ownership,” namely, the fact that the giant institutional investors who dominate today’s markets tend to own stock in everything, and this may be a good thing but can also be bad if it encourages collusive behavior among competing firms linked by the same set of shareholders.

What has received less attention is the effect of common ownership on shareholder voting and corporate transactions.  When a handful of large shareholders own stock in two merging partners – say, Tesla and SolarCity (not a hypothetical, incidentally) – they may vote for less-than-optimal deals on one side in order to benefit their holdings on the other side. 

There are two implications to this:  First, these cross-holdings may incentivize corporate managers to pursue nonwealth maximizing transactions when cross-holders are a significant part of the shareholder base (and may call into question the disinterestedness of large shareholders for Corwin cleansing purposes).  And second, very often, these institutional shareholders are actually mutual funds, with cross-holdings not in a single fund, but in multiple funds across a fund family.  Yet their voting patterns (or the actions of their portfolio firms) suggest…

Tomorrow, we’ll host the first (and possibly annual) Corporate Governance Summit at the University of Nevada, Las Vegas William S. Boyd School of Law for public company directors and others involved in the corporate governance space.  Greenberg Traurig is co-hosting the event with us.  They, and some of the dedicated staff at UNLV, have done so much of the heavy lifting to get the event together.  I’m incredibly grateful for the work the team has put into this.  We’ve assembled a strong mix of panelists including directors, officers, law professors, and corporate lawyers.  

We’ve pulled together a series of panels focusing on hot topics this year.  We’ve got:

  • Basic Legal Duties
  • Cyber-security and Oversight
  • Shareholder Activism
  • Compensation
  • Social Media
  • Diversity 
  • Sexual Harassment

As I’m looking at the topics we’re hitting tomorrow, I’m also thinking ahead.  Many of these issues will probably still be significant next year.  What do we think the broader trends will be in the next five to ten years?  My early sense is that stakeholder governance will draw more and more attention. If we do decide to give non-shareholder stakeholders more voice in corporate governance, I’m not yet sure about the most efficient way to do that.  

…

Professor Kathryn Judge recently posted an essay, The New Mechanisms of Market Inefficiency (here), forthcoming in the Journal of Corporation Law.  It is a fascinating read, in addition to being a beautifully written piece.  As a banking law scholar, I’m familiar with the concept of and demand for information insensitive assets/money-like assets/safe assets/money (overlapping terms, as Judge notes).  However, this essay challenged me to think more deeply about the delicate interplay in financial markets between such assets and “information sensitive” ones, and about mechanisms fostering market efficiency and those supporting market inefficiency.  For example, Judge explains that “in order to produce some assets that are insensitive to information, markets also produce other subordinated assets that are backed by the same pool of assets and that are very sensitive to changes in the value of those assets.  As a result, domains of ‘information insensitivity’ are almost always nested on top of information sensitive domains and the border between the two is far from stable.” (p.6) 

Ultimately, this essay’s purpose is not to answer a number of “fundamental and as yet unanswered questions about the health and functioning of today’s capital markets” (p.4), but rather to reveal their importance…

It wasn’t terribly long ago (okay, fine, it was 23 years ago, I’m dating myself) when Friends aired this:

I’m guessing that depiction of stock trading was accurate for most people; it wasn’t that it was necessarily hard to open a brokerage account and trade, it was simply that most people didn’t quite understand the mechanics of how to go about it.  Even with online trading, you still have to go out of your way to seek opportunities to trade.  But what happens if stock trading is one of several simple options presented when people open up an app that they use every day?

That question is apparently about to be answered: Square, the payments app, recently announced that it will begin permitting free stock trades on its platform, setting itself up as a competitor to Robinhood. And the part that interests me isn’t simply the prospect of free trading, but the prospect of easy trading, accomplished with all the forethought of a candy bar purchase in the grocery check out aisle.

I suppose retail shareholders will never replace institutions for sheer size, but enough could enter the market to make some difference.  Will their uninformed trades create…

A new report from the Global Financial Literacy Excellence Center sheds some light on how workplace-only investors differ from others.  The report identifies workplace-only investors as persons “who only have retirement accounts through their employers.”  These are people who do not invest outside of these workplace-affiliated accounts.  They account for about 15% of the total population studied in the report.  As a group, about 53% of workplace-only investors are women.  In contrast, the report identifies active investors as persons who have investment accounts in addition to any workplace accounts.  This accounts for 43% of the population studied.  Another 42% simply don’t have any investments–employment or otherwise.

The report finds that financial literacy levels differ by type of investor and that a financial literacy gap exists between active investors and workplace-only investors.  While most people get basic asset-pricing questions wrong, “workplace-only investors exhibited an even lower understanding of asset pricing.” They also exhibited lower understanding on diversification questions.

More and more people now find themselves automatically enrolled in retirement accounts.  They begin to regularly invest this way with each pay period.  It doesn’t surprise that many people who have invested this way do not develop the same level of financial literacy…

The Laundromat is Steven Soderbergh’s (and Netflix’s) loose adaptation of James Bernstein’s nonfiction book, Secrecy World: Inside the Panama Papers, illustrating the conduct facilitated  by shell companies and the lawyers who supply the paperwork.  Both in style and substance, it echoes Adam McKay’s The Big Short – which is why every. single. review. draws that comparison, and so will I – but sadly, I found it neither as entertaining nor as coherent.

The Laundromat takes the form of multiple vignettes regarding people whose lives are touched by the shell entities facilitated by the lawyers at Mossack Fonseca, with Gary Oldman and Antonio Banderas narrating as Mossack and Fonseca, respectively.  They break the fourth wall as they offer tuxedo-clad, cynical descriptions of the services the firm provides.

Despite shoutouts to 1209 North Orange and its 285,000 companies – as well as the confession, I assume truthful, that Soderbergh has companies at that location – the film never really offers an explanation of precisely what shell companies do for their owners.  That was one of the things I thought The Big Short attempted reasonably well: It took the complexity of the financial crisis and made a decent stab of explaining…

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