Financial economics and corporate governance have long focused on the agency problems between corporate managers and shareholders that result from the dispersion of ownership in large publicly traded ...corporations. In this paper, we focus on how the rise of institutional investors over the past several decades has transformed the corporate landscape and, in turn, the governance problems of the modern corporation. The rise of institutional investors has led to increased concentration of equity ownership, with most public corporations now having a substantial proportion of their shares held by a small number of institutional investors. At the same time, these institutions are controlled by investment managers, which have their own agency problems vis-à-vis their own beneficial investors. We develop an analytical framework for understanding the agency problems of institutional investors, and apply it to examine the agency problems and behavior of several key types of investment managers, including those that manage mutual funds—both index funds and actively managed funds—and activist hedge funds. We show that index funds have especially poor incentives to engage in stewardship activities that could improve governance and increase value. Activist hedge funds have substantially better incentives than managers of index funds or active mutual funds. While their activities may partially compensate, we show that they do not provide a complete solution for the agency problems of other institutional investors.
We develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts. We account for adverse selection by modeling unobserved ...heterogeneity in both risk (claim rate) and risk aversion. We find large and skewed heterogeneity in risk attitudes. In addition, women are more risk averse than men, risk aversion exhibits a U-shape with respect to age, and proxies for income and wealth are positively associated with absolute risk aversion. Finally, unobserved heterogeneity in risk aversion is greater than that of risk, and, as we illustrate, has important implications for insurance pricing.
This paper investigates the effects of mandatory seat belt laws on driver behavior and traffic fatalities. Using a unique panel data set on sent belt usage in all U.S. jurisdictions, we analyze how ...such laws, by influencing seat belt use, affect the incidence of traffic fatalities. Allowing for the endogeneity of seat belt usage, we find that such usage decreases overall traffic fatalities. The magnitude of this effect, however, is significantly smaller than the estimate used by the National Highway Traffic Safety Administration. In addition, we do not find significant support for the compensating-behavior theory, which suggests that seat belt use also has an indirect adverse effect on fatalities by encouraging careless driving. Finally, we identify factors, especially the type of enforcement used, that make seat belt laws more effective in increasing seat belt usage.
This paper investigates the incentive effects of automobile insurance, compulsory insurance laws, and no‐fault liability laws on driver behavior and traffic fatalities. We analyze a panel of 50 U.S. ...states and the District of Columbia for 1970–98, a period in which many states adopted compulsory insurance regulations and/or no‐fault laws. Using an instrumental variables approach, we find evidence that automobile insurance has moral hazard costs, leading to an increase in traffic fatalities. We also find that reductions in accident liability produced by no‐fault liability laws have led to an increase in traffic fatalities (estimated to be on the order of 6 percent). Overall, our results indicate that, whatever other benefits they might produce, increases in the incidence of automobile insurance and moves to no‐fault liability systems have significant negative effects on traffic fatalities.
This article reviews and evaluates the empirical literature on adverse selection in insurance markets. We focus on empirical work that seeks to test the basic coverage—risk prediction of adverse ...selection theory—that is, that policyholders who purchase more insurance coverage tend to be riskier. The analysis of this body of work, we argue, indicates that whether such a correlation exists varies across insurance markets and pools of insurance policies. We discuss various reasons why a coverage—risk correlation may not be found in some pools of insurance policies. The presence of a coverage—risk correlation can be explained either by moral hazard or adverse selection, and we discuss methods for distinguishing between them. Finally, we review the evidence on learning by policyholders and insurers.
What Matters in Corporate Governance? Bebchuk, Lucian; Cohen, Alma; Ferrell, Allen
The Review of financial studies,
02/2009, Letnik:
22, Številka:
2
Journal Article
Recenzirano
Odprti dostop
We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index ...(Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990-2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.
This paper uses a unique panel data set of an insurer's transactions with repeat customers. Consistent with the asymmetric learning hypothesis that repeated contracting enables sellers to obtain an ...informational advantage over their rivals, I find that the insurer makes higher profits in transactions with repeat customers who have a good claims history with the insurer, the insurer reduces the price charged to these repeat customers by less than the reduction in expected costs associated with such customers, and repeat customers with bad claim histories are more likely to flee their record by switching to other insurers.
Abstract Recent years have seen increased interest in gender diversity within corporate America. CEOs’ political preferences have been shown to influence many corporate decisions. Evidence suggests ...that views on gender equality align more with political preferences than an individual’s gender. We investigate if CEOs’ political leanings correlate with female representation and compensation in the executive suite. We discover that Democratic CEOs (those donating more to Democratic candidates) correlate with greater female presence in the executive suite. Using an event-study method, we find replacing a Republican with a Democratic CEO leads to a 20%–50% rise in executive suite female representation. Additionally, Democratic CEOs significantly reduce, or eliminate, the gender pay gap in executive compensation levels and performance sensitivity.
This paper investigates whether judge political affiliation contributes to racial and gender disparities in sentencing using data on over 500,000 federal defendants linked to sentencing judge. ...Exploiting random case assignment, we find that Republican-appointed judges sentence black defendants to 3.0 more months than similar nonblacks and female defendants to 2.0 fewer months than similar males compared to Democratic-appointed judges, 65 percent of the baseline racial sentence gap and 17 percent of the baseline gender sentence gap, respectively. These differences cannot be explained by other judge characteristics and grow substantially larger when judges are granted more discretion.
This paper tests the predictions of adverse-selection models using data from the automobile insurance market. I find that, in contrast to what recent research suggests, the evidence is consistent ...with the presence of informational asymmetries in this market: new customers choosing higher insurance coverage are associated with more accidents. Consistent with the possibility of policyholders' learning about their risk type, such a coverage-accidents correlation exists only for policyholders with enough years of driving experience. The informational advantage that new customers with driving experience have over the insurer appears to arise in part from customers' underreporting their past claim history: policyholders switching to new insurers are disproportionately ones with a poor claims history, and new customers tend to underreport their past claims history when joining a new insurer.
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