1. C.Drago 1 Inducing Corporate Compliance: A Law and Economics Analysis of Corporate Liability Regimes by Sharon Oded Discussion: Carlo Drago EALE 2009: “Corporate Governance and Finance”. LUISS University Rome (Italy), 19 September 2009 1

2. Outline Inducing Corporate Governance: paper themes The Key point: Corporate Compliance and Self- Enforcement Decisions The Empirical Side of the Decisions in Compliance and Disclosure Impact of the Free Float on Compliance and Disclosure Empirical Side: Clusters of Corporate Governance Markets, disclosure and financial mis-reporting Leximetrical Approaches in regimes comparisons 2 C.Drago

3. Inducing Corporate Governance: Paper Themes (I) The role of governmental regulations Enforcement and compliance The role of corporate liability Evaluating the traditional liability regimes …“A corporate liability regime may be socially optimal if it is bifurcated into the following layers: first, a default sanction which equals the sum of the social harm caused by the violation and the social enforcement costs, divided by the probability of detection; and second, a mitigated sanction which equals the social harm caused by the violation…” “The mitigated sanction shall be imposed when a corporation has appropriately self-reported the violation…” (Oded 2009) 3

4. C.Drago Inducing Corporate Governance: Paper Themes (II) Paper conclusions I: “The application of the proposed compound regime…” Paper conclusion II: “…is not free of practical challenges…” Paper remark I: “This paper has not investigated the role that corporate liability regimes may play in coping with agency problem between shareholders and managers…” (Oded 2009) 4

5. C.Drago The Key point: Corporate Compliance and Self-Enforcement Decisions 5 Oded 2009

6. C.Drago The Empirical Side of the Decisions in Compliance and Disclosure Growing literature on the description at company level of compliance and disclosure (Patel Dallas 2002, Webb Cohen Nath Wood 2008 Santella Drago Paone 2005) Patel-Dallas (2002) describe the Standard & Poor’s T&D study analysing disclosure and transparency over the major companies of the globe Santella Drago Paone (2005) analyse compliance and disclosure on the directors formally considered as independent in the italian blue chips Both studies show large differences in company disclosure and compliance. Market pressure (measured according to free float) seems to induce an higher level of disclosure\compliance on the companies Anyway it would interesting to explore more in detail the patterns of compliance and disclosure by considering the different criteria of a specific regulation. In that sense it could be useful to analyse empirically the self-enforcement decisions at company level. 6

7. Empirical Side: Preda and EC Independence Criteria C.Drago 7 Comparing Disclosure and Compliance on independent directors independence standards in Italy in 2003 Higher levels of compliance and disclosure (Santella Drago Paone 2005)

8. Empirical side: EC criteria C.Drago 8 Comparing Disclosure and Compliance on independent directors independence standards in Italy in 2003 High disclosure and compliance

9. C.Drago Clusters of Corporate Governance 9 High disclosure and compliance

10. Impact of the Free Float on Compliance and Disclosure C.Drago 10 …Free float (market pressure) tends to induce higher levels of compliance and disclosure… ComplianceNot disclosure

11. C.Drago Empirical Side: Clusters of Corporate Governance… The empirical evidence shows different patterns in compliance and disclosure These patterns are related to specific industries or sectors and they seem to be related to the free float… The role of disclosure cannot be undervalued The risk of misreporting (opportunistic disclosure) should also be taken into account. 11

12. C.Drago Markets, disclosure and financial mis- reporting Markets seem to consider disclosure as an indicator of company performance. Higher levels of adversariality in investors’ voting patterns in countries where there are lower disclosure and compliance levels (Santella Baffi Drago Lattuca 2009) Another question: are markets fully informed on company governance? …On the financial misreporting see for example Melis and Melis (2004) Importance of detecting corporate governance failures What is the time of response of markets to governance failures? 12

13. C.Drago Leximetrical Approaches in regimes comparisons Defining liabilities regimes in an evolutionary sense. What is the evolution of the regimes over the time? The evolution of the regimes can be specifically described by using Leximetrical tecniques to measure them consistently. See in this sense Lele-Siems (2007) We would then need to compare outcomes of the regimes to estabilish causality in a statistical sense Is there empirical evidence on positive outcomes for each regime? 13

14. C.Drago Bibliography Lele Siems (2007) “Shareholder Protection – A Leximetric Approach “ 7 Journal of Corporate Law Studies 17-50 Melis, Melis (2004 ) “ Financial Reporting, Corporate Governance and Parmalat. Was it a Financial Reporting Failure?” Available at SSRN: http://ssrn.com/abstract=556575 Oded (2009) “Inducing Corporate Compliance: A Law and Economics Analysis of Corporate Liability Regimes” Rotterdam Institute of Law and Economics (RILE) Working Paper Series www.rile.nl No. 2009/04www.rile.nl Patel, Dallas (2002) “Transparency and Disclosure: Overview of Methodology and Study Results - United States” Available at SSRN: http://ssrn.com/abstract=422800 or DOI: 10.2139/ssrn.422800 Santella Baffi Drago Lattuca (2008) “A Comparative Analysis of the Legal Obstacles to Institutional Investor Activism in Europe and in the US” Available at SSRN: http://ssrn.com/abstract=1137491 14

15. C.Drago Bibliography Santella Drago Paone (2007) “Who Cares About Director Independence? “. Available at SSRN: http://ssrn.com/abstract=971189 Webb Cohen Nath Wood (2008) “Survey of Governance Disclosures Among U.S. Firms”. Journal of Business Ethics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1105220 15