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Securities and Exchange Commission cites UT professors on stock offerings, labor unions

March 2, 2015

The Securities and Exchange Commission recently referenced two research papers by University of Tennessee, Knoxville, Haslam College of Business professor Tracie Woidtke, David E. Sharp/Home Federal Bank of Tennessee Professor in Banking and Finance. One of the papers was co-authored by Sarah Clinton of Haslam’s Department of Accounting and Information Management.

The paper by Clinton and Woidtke assuages fears about the ability of large companies to offer new shares of stock at will. In 2005, the SEC eased regulations on new stock offerings for the largest public corporations in the United States. The intention was to cut delays for well-known issuers, giving them timely access to capital and enabling transparency for investors on the company’s plans for the future. Critics argued that loosening restrictions would allow corporations to paint an unrealistically rosy picture of business, while potentially selling stocks at an inflated price.

Clinton and Woidtke, in collaboration with co-author Joshua T. White (University of Georgia), examined the actual effect of the more lenient rule on the market, concluding that it helps issuers and investors alike. “Disclosure about expansions provides more information about the firm’s future prospects to help investors assess the value of the stock and help firms raise money at a fair price,” says Woidtke. The study found no evidence of over-valuation as a result of the change.

SEC commissioner Michael Piwowar cited the report when questioned regarding why the SEC did not retract the privilege from companies who violate SEC regulations. The SEC further relied on Woidtke and Clinton’s findings when examining the implications of lowering the minimum total value of a company’s stock required to qualify for the full benefits of the reform.

Woidtke also was invited to speak to the SEC and George Washington University regarding her report on the perception of public and labor union pension funds’ behavior as shareholders. A proposed regulatory change might give these groups more power to influence company management, and opponents claim both camps are motivated by political interests rather than wealth aggregation for shareholders.

Woidtke and co-author Diane Del Guercio, of the University of Oregon, found a large difference between the public and labor union fund activism. According to their research, stock returns are significantly greater when companies are expected to implement public pension fund proposals—a sign of shareholder approval. The reverse is true in anticipation of corporations adopting measures advocated by labor union pension activists, indicating these policies are a cause for concern to shareholders.

Directors seem to be wary of and guard against the labor union pension lobby, however. The study shows directors only tend to cater to special interest activists when the cost of ignoring such groups is high, i.e. when employee relations are used in bargaining.

To read Clinton, Woidtke and White’s full paper discussing new stock offering regulations, please click here.

To read Woidtke and Guercio’s full report on public and labor union activism, please clickhere.