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V O L U M E 1 7 | N U M B E R 4 | FALL 2005

Journal of

APPLIED COR PORATE FINANCE
A MO RG A N S TA N L E Y P U B L I C AT I O N

In This Issue: Executive Pay and Corporate Governance
Pay Without Performance: Overview of the Issues A Remedy for the Executive Pay Problem: The Case for “Compensation Discussion and Analysis” Developments in Remuneration Policy Corporate Culture and the Problem of Executive Compensation Taking Shareholder Protection Seriously? Corporate Governance in the U.S. and Germany University of Rochester Roundtable on Corporate M&A and Shareholder Value 8

Lucian A. Bebchuk, Harvard Law School, and Jesse M. Fried, University of California at Berkeley

24

Jeffrey N. Gordon, Columbia University

36

Alastair Ross Goobey, International Corporate Governance Network and Morgan Stanley Europe

41 44

Arthur Levitt, Jr., The Carlyle Group Theodor Baums, University of Frankfurt, and Kenneth E. Scott, Stanford Law School and Hoover Institution

64

Panelists: Robert Bruner, University of Virginia; Cliff Smith and Gregg Jarrell, University of Rochester; James Owen, The Bank Street Group; Marla Sincavage, Ernst & Young; and Matt Ostrower, Morgan Stanley. Moderated by Mark Zupan, University of Rochester.

Takeover Defenses and Bargaining Power Is U.S. CEO Compensation Broken? Top Management Incentives and Corporate Performance Letting Go of Norm: How Executive Compensation Can Do Better Than “Best Practices” Finance, Politics, and the Accounting for Stock Options

85 97

Guhan Subramanian, Harvard Law School John E. Core and Wayne R. Guay, University of Pennsylvania, and Randall S. Thomas, Vanderbilt University

105

Stephen F. O’Byrne, Shareholder Value Advisors, and S. David Young, INSEAD

115

Marc Hodak, Hodak Value Advisors

125

Conrad Ciccotello, Georgia State University, C. Terry Grant, California State University, Fullerton, and W. Mark Wilder, University of Mississippi

U.S. Family-Run Companies—They May Be Better Than You Think The Limits of Organizational Theory and Incentives (Or, Why Corporate Success Is Not Just About Money)

134 144

Henry McVey and Jason Draho, Morgan Stanley Ronald Schmidt, University of Rochester

University of Rochester Roundtable on Corporate M&A and Shareholder Value Lehman Brothers | New York | May 5, 2005
Photographs by Yvonne Gunner, New York

64

Journal of Applied Corporate Finance • Volume 17 Number 4

A Morgan Stanley Publication • Fall 2005

ROUN DTAB LE

Mark Zupan: Good evening, I’m Mark

Zupan. For those of you I haven’t yet had the chance to meet, I’m the new Dean of the University of Rochester’s Simon School of Business. Let me welcome you all to what I think you’ll find an interesting and informative discussion. And before we get started, I want to thank two of our alums, Drew Hearon and Peter Alpern of Lehman Brothers, for hosting this event. Our topic is the effect of mergers and acquisitions on shareholder value and the general economy. It’s pretty clear that investment bankers benefit from corporate M&A, as do the lawyers and accountants who also help make these transactions happen. And there seems little reason to doubt that at least one group of shareholders does well in these deals— the shareholders of the companies that are acquired. What is less clear, though, is how such deals affect the values of the acquiring companies. We can all think of cases where the stock prices of companies announcing large deals dropped by 10% or more. But do such price reactions do a good job of capturing the longer-term effects of these transactions on the values of the acquirers? And is it true, as a BusinessWeek cover story asserted a few years ago, that most M&A deals end up destroying shareholder value? To help us explore these questions, we’re very fortunate to be joined tonight by Robert Bruner, an academic expert on M&A who has been on the finance faculty of the University of Virginia’s Darden School...
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