Research co-authored by Bayes Business School (formerly Cass) shows that larger public companies suffer from loss of innovation and lower share price value when managers are permitted to make decisions in their own self-interest rather than that of the organization.
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The study, by Anh Tran, Professor of Finance and Academic Director in the Mergers and Acquisitions Research Center (MARC) at Bayes, Professor Eliezer Fich, Drexel University and Professor Jarrad Harford, University of Washington, examined the effects of waiving fiduciary duties—effectively the agreement that management makes decisions to benefit an organization rather than itself—in the United States following gradual relaxations in state law.
Agency conflicts arise when managers and shareholder interests diverge, most commonly in the event of managers accepting contracts for extra remuneration or to further their own careers, or through a "corporate opportunity waiver." As the study suggests, these conflicts become more problematic in larger corporations where there is greater distance between shareholders and decision makers.
Key findings of the research include:
Investment in research and development (R&D) falls by 19%, firm patent value falls by 18% and patent volume declines by 9% in the year after fiduciary waivers are adopted and remain lower thereafter.
The contribution of remaining R&D spend and incremental patent value are also lowered by waiving fiduciary laws. A 1% rise in R&D intensity yields a 0.4% increase in market value with a waiver, down from 0.52% without.
Firms who undergo waiver laws experience a higher rate of inventor and skilled employee departures. Those who possess the most talent are more likely to leave for startups, while those who remain are less productive in terms of their innovation, obtaining 1.4% fewer patents and 5.5% fewer citations than before the waiver was put in place.
Firm value increases by $0.85 for holding an additional dollar of cash reserves but this effect is seven to 12% lower than prior to adopting a waiver.
Once adopting the waiver, firms are more likely to make acquisition bids but their deals are of lower quality.
The deal announcement returns are on average 77 basis points lower and these acquirers are less likely to withdraw from acquisitions with negative returns than without legal waivers in place.
Higher managerial ownership and a higher proportion of independent directors on the board reduce negative effects of adopting waivers. Small companies benefit, in fact, because relaxing fiduciary duty enables them to attract capital from venture capital and private equity investors while retaining experienced individuals.
Removing them would make this harder to accomplish due to the overlapping or fiduciary duties with other firms.
The study, by Anh Tran, Professor of Finance and Academic Director in the Mergers and Acquisitions Research Center (MARC) at Bayes, Professor Eliezer Fich, Drexel University and Professor Jarrad Harford, University of Washington, examined the effects of waiving fiduciary duties—effectively the agreement that management makes decisions to benefit an organization rather than itself—in the United States following gradual relaxations in state law.
Agency conflicts arise when managers and shareholder interests diverge, most commonly in the event of managers accepting contracts for extra remuneration or to further their own careers, or through a "corporate opportunity waiver."
As the study suggests, these conflicts become more problematic in larger corporations where there is greater distance between shareholders and decision makers.
Key findings of the research include:
Investment in research and development (R&D) falls by 19%, firm patent value falls by 18% and patent volume declines by 9% in the year after fiduciary waivers are adopted and remain lower thereafter.
The contribution of remaining R&D spend and incremental patent value are also lowered by waiving fiduciary laws. A 1% rise in R&D intensity yields a 0.4% increase in market value with a waiver, down from 0.52% without.
Firms who undergo waiver laws experience a higher rate of inventor and skilled employee departures. Those who possess the most talent are more likely to leave for startups, while those who remain are less productive in terms of their innovation, obtaining 1.4% fewer patents and 5.5% fewer citations than before the waiver was put in
lace.
Firm value increases by $0.85 for holding an additional dollar of cash reserves but this effect is seven to 12% lower than prior to adopting a waiver.
Once adopting the waiver, firms are more likely to make acquisition bids but their deals are of lower quality. The deal announcement returns are on average 77 basis points lower and these acquirers are less likely to withdraw from acquisitions with negative returns than without legal waivers in place.
Higher managerial ownership and a higher proportion of independent directors on the board reduce negative effects of adopting waivers.
Small companies benefit, in fact, because relaxing fiduciary duty enables them to attract capital from venture capital and private equity investors while retaining experienced individuals. Removing them would make this harder to accomplish due to the overlapping or fiduciary duties with other firms. ■
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