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We argue and demonstrate empirically that a firm's institutional and legal context has first‐order effects in tests that use state antitakeover laws for identification. A priori, the size and direction of a law's effect on a firm's takeover protection depends on (i) other state antitakeover laws, (ii) preexisting firm‐level takeover defenses, and (iii) the legal regime as reflected by important court decisions. In addition, (iv) state antitakeover laws are not exogenous for many easily identifiable firms. We show that the inferences from nine prior studies related to nine different outcome variables change substantially when we include controls for these considerations.

Many researchers use the G-index or E-index to measure firms’ takeover defenses. Others argue that these indices are not related to firms’ takeover likelihoods. We find that, unlike their raw values, the instrumented versions of these indices are significantly and negatively related to acquisition likelihood. The difference between the raw and instrumented results indicates that the G-index and E-index include an endogenous component and highlights the importance of accounting for endogeneity in tests that use takeover indices to measure takeover deterrence. We provide data on new instruments that researchers can use to address these issues.Received April 13, 2016; editorial decision October 14, 2016 by Editor David Dennis.

Garrett Hardin’s “The Tragedy of the Commons” (Hardin, 1968) is widely influential but conceptually flawed. Hardin characterizes the commons problem as arising from the exercise of free will in a world with limited carrying capacity. Hardin’s solutions to this problem emphasize coercive policies, including traditional command-and-control environmental and natural resource regulations. In contrast, the property rights literature that preceded Hardin – especially Gordon (1954), Scott (1955), Coase (1960), Alchian (1965), and Demsetz (1967) – shows that the commons problem arises from non-exclusive use rights. Non-exclusivity is part of a broader class of restrictions on private ownership, any of which fosters dissipative rent seeking. The property rights literature focuses on value creation rather than just the physical exhaustion of the commonly owned resource. It is therefore more general, and highlights solutions that are less coercive and dissipative, than the more widely known views espoused by Hardin.

In a 2016 paper (Fang, Huang, and Karpoff, 2016), we report that firms exposed to an increase in the prospect of short selling during the Reg SHO pilot program have lower discretionary accruals during the pilot period. Black, Desai, Litvak, Yoo, and Yu (2019, hereafter, BDLYY) argue that this result is not replicable. We show that BDLYY’s claim is incorrect. The accruals result previously was replicated in papers by Massa, Zhang, and Zhang (2015) and Heath, Ringgenberg, Samadi, and Werner (2019), and is easily replicable using data and code that we have shared widely since 2014 – including with the BDLYY team in 2015 – and that we recently posted publicly. The accruals result also is robust to a wide range of specification changes, including those implied by the BDLYY paper, which include: various measures of performance-matched discretionary accruals and total accruals; using our original 2012 Compustat data or currently available 2019 Compustat data; including both firm and year fixed effects; including or excluding other covariates in the difference-in-differences (DiD) tests; and using unbalanced rather than balanced panels. We conjecture that BDLYY’s results are inconsistent with prior results because they rely partly on non-standard accruals measures and/or use samples that differ from those used by Fang et al. (2016), Massa et al. (2015), and Heath et al. (2019). We conclude by discussing two theoretical concerns. First, we reiterate that an observed increase in short selling during the Reg SHO period is neither necessary nor sufficient to establish that the prospect of short selling has a disciplinary effect on earnings management, as managers’ endogenous adjustments affect short sellers’ opportunities and observed short selling. Second, we discuss a concern that the Reg SHO change appears to be too small to explain a wide range of firm outcomes, as recent empirical findings suggest.

We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is associated with a faster time-to-discovery, and it dampens the share price inflation that occurs when firms misstate their earnings. These results indicate that short sellers anticipate the eventual discovery and severity of financial misconduct. They also convey external benefits, helping to uncover misconduct and keeping prices closer to fundamental values when firms provide incorrect financial information.

This paper examines the sizes of the fines, damage awards, remediation costs, and market value losses imposed on companies that violate environmental regulations. Firms that violate environmental laws suffer statistically significant losses in the market value of firm equity. The losses, however, are of similar magnitudes to the legal penalties imposed, and in the cross section, the market value loss is related to the size of the legal penalty. Thus, environmental violations are disciplined largely through legal and regulatory penalties, not through reputational penalties.

Fraud scandals can create incentives to change managers in an attempt to improve the firm's performance, recover lost reputational capital, or limit the firm's exposure to liabilities that arise from the fraud. It also is possible that the revelation of fraud creates incentives to change the composition of the firm's board, to improve the external monitoring of managers, or to rent new directors' valuable reputational or political capital. Despite such claims, we find little systematic evidence that firms suspected or charged with fraud have unusually high turnover among senior managers or directors. In univariate comparisons, there is some evidence that firms committing fraud have higher managerial and director turnover. But in multi-variate tests that control for other firm attributes, such evidence disappears. These findings indicate that the revelation of fraud does not, in general, increase the net benefits to changing managers or the firm's leadership structure. Copyright 1999 by the University of Chicago.

During 2005 to 2007, the SEC ordered a pilot program in which one-third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short-sale price tests. Pilot firms’ discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre-experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency.

Proponents of state antitakeover legislation argue that previous empirical tests by financial economists of the wealth effects of Pennsylvania's 1990 antitakeover law are biased. We show that the proponents are correct. In particular, firm size, event-time clustering, and non-synchronous trading effects account for the wealth decreases reported in earlier studies. We also show, however, that both proponents and critics of the Pennsylvania legislation have ignored the earliest press release about it. The wealth effect associated with this announcement is negative, large, and statistically significant. These results therefore are consistent with the hypothesis that the Pennsylvania law decreased company values and with the hypothesis that the initial market reaction is an unbiased estimate of the law's effect on firm values.

We find that evidence of a positive stock price reaction to the announcement of a name change is very weak and is sensitive to sample selection. We interpret the evidence as a caution against the popular opinion that corporate name changes have significant valuation effects. We also find little evidence that corporate name changes correspond to changes in a firm's stock return covariability with its industry index or changes in the firm's earnings growth rate. These results cast doubt on two purported motives for name changes: that they convey information to the market about changes in the firm's line of business or that they signal management's private information about the firm's future performance. Corporate name changes may serve useful purposes, but such purposes have small valuation effects or tend to be anticipated by investors.

The 13 regional corporations established by the Alaska Native Claims Settlement Act of 1971 (ANCSA) historically have performed poorly. The illusory appearance of improved performance during the latter 1980s resulted from a temporary tax loophole and accounting conventions for undeveloped land. The firms have performed poorly primarily because of ANCSA restrictions, which have not changed substantially since the Act's passage. This paper examines the 13 regional corporations'financial performance from 1984 to 1989 and suggests ways of alleviating the costs of these restrictions. Most importantly, the authors recommend that future Native settlements avoid the organizational restrictions inherent in ANCSA.

We examine the importance of dividend-capture trading in NASDAQ stocks by testing for cross-sectional relations between ex-day abnormal returns and bid-ask spreads. Throughout, we find that ex-day returns and spreads are positively related. The relation increases across dividend-yield quintiles and is strongest in high-yield stocks. The relation does not appear in a sample of non-ex-dividend days. These findings indicate that dividend-capture trading affects the ex-day returns of at least some, particularly high-yield, NASDAQ stocks, and that dividend-capture trading is important for understanding ex-dividend-day returns.

We examine the penalties imposed on the 585 firms targeted by SEC enforcement actions for financial misrepresentation from 1978–2002, which we track through November 15, 2005. The penalties imposed on firms through the legal system average only $23.5 million per firm. The penalties imposed by the market, in contrast, are huge. Our point estimate of the reputational penalty—which we define as the expected loss in the present value of future cash flows due to lower sales and higher contracting and financing costs—is over 7.5 times the sum of all penalties imposed through the legal and regulatory system. For each dollar that a firm misleadingly inflates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $3.08. Of this additional loss, $0.36 is due to expected legal penalties and $2.71 is due to lost reputation. In firms that survive the enforcement process, lost reputation is even greater at $3.83. In the cross section, the reputation loss is positively related to measures of the firm's reliance on implicit contracts. This evidence belies a widespread belief that financial misrepresentation is disciplined lightly. To the contrary, reputation losses impose substantial penalties for cooking the books.

A dividend tax penalty creates profitable trading opportunities for short-term traders with sufficiently low transaction costs. In stocks with ex-dividend day returns affected by short-term trading, ex-day returns are positively correlated with transaction costs. Data from 1964–1985 indicate that short-term traders are the marginal investors in high-yield stocks, primarily since the introduction of negotiated commissions on the NYSE. Short-term trading is not evident in low-yield stocks, nor does it appear prevalent before negotiated commissions.

The Alaska Native Claims Settlement Act of 1971 (ANCSA) established thirteen diffusely held profit-seeking corporations that were saddled with unusual organization restrictions, the most important of which is that stock cannot be traded. We find that these firms are characterized by poor financial performance, a high incidence of control contests, and high turnover among directors and managers. These and other findings about ANCSA firms are consistent, overall, with the theory of the firm. The results illustrate the importance of organizational form in accomplishing productive activities, and particularly the importance of freely transferrable shares for organizational efficiency in diffusely held corporations.

Previous researchers have documented an empirical correlation between returns and trading volume in some financial markets. In this paper, an explanation is proposed based on the notion that short positions are more costly than long positions in these markets. The hypothesis is consistent with previous findings and with futures markets data, in which the costs of assuming short and long positions are symmetric and in which the correlation between returns and volume is not significant.

A theory of trading volume is developed based on assumptions that market agents frequently revise their demand prices and randomly encounter potential trading partners. The model describes two distinct ways informational events affect trading volume. One is consistent with conjectures made by empirical researchers that investor disagreement leads to increased trading. But the observation of abnormal trading volume does not necessarily imply disagreement, and volume can increase even if investors interpret the information identically, if they also have had divergent prior expectations. Simulation tests support the model and are used to contrast the random-pairing environment with costless market clearing. Volume is lower in the costly market, and volume increases caused by an informational event persist after the event period. This is consistent with existing empirical evidence and suggests that markets do not immediately clear all orders or that investors have demands to recontract.

The issue of non-pecuniary benefits in commercial fishing is examined using data from the Alaska salmon fisheries, which are subject to entry limitations. It is concluded that, while limited entry permit prices reflect primarily pecuniary factors, the continued presence of many low-revenue fishermen in the fisheries suggests that they, at least, derive non-money benefits. However, the existence of non-pecuniary benefits does not appear to depend substantially on the gear type or geography of the fishery.

This paper reviews previous and current research on the relation between price changes and trading volume in financial markets, and makes four contributions. First, two empirical relations are established: volume is positively related to the magnitude of the price change and, in equity markets, to the price change per se. Second, previous theoretical research on the price-volume relation is summarized and critiqued, and major insights are emphasized. Third, a simple model of the price-volume relation is proposed that is consistent with several seemingly unrelated or contradictory observations. And fourth, several directions for future research are identified.

Karpoff reports on a “barter trading game” in which students exchanged real goods over a period of seven weeks with different market constraints imposed each week. Student comments about the exercise were favorable.