When do shareholder rights matter more? :: Business Line

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Firms in which the shareholder finds it easier to forecast the effect of a particular management action on the future value of the firm benefit much more from such shareholder rights than do their less transparent counterparts, says a preliminary paper titled ‘‘Signal quality and the option value of shareholder rights'' by Abhiroop Mukherjee of the Department of Finance, Hong Kong University of Science & Technology (www.ssrn.com).

When the information environment in which the firm operates is relatively transparent, the manager understands that the shareholder will find it easy to interpret the impact of management decisions or actions on firm value, the author explains. “Thus, if the manager does not act in the shareholder's best interest, the shareholder will readily become aware of this. If the shareholder has strong rights, she can then bring the governance rules for reprisals into play.”

On the other hand, as the paper distinguishes, when information quality is poor, the shareholder might find it difficult to figure out whether or not the manager is acting in her interest. As a result, in these less transparent firms, the manager might get away without triggering any reprisal, even if he acts contrarily to the shareholder's interest, and even if the shareholder has strong rights to punish bad management, cautions Mukherjee. He concludes by observing, therefore, that shareholder rights matter more for firms that operate in a better information environment; and that for firms that operate in sufficiently opaque environments, shareholder rights do not have any value at all.

A case for greater transparency that can benefit the shareholders.

Peak of life cycle wealth

Who is wealthy? This is the question that Stefan Hochguertel of the VU University Amsterdam, and Henry Ohlsson of the Uppsala University explore in ‘‘Who is at the top? Wealth mobility over the life cycle.'' In the authors' view, the answer is, “Probably an individual in his 60s, married, living in a big household and with more than twelve years of education. He would have been born in the capital city region. The employment income of the household would be high but variable. The macroeconomic environment would be characterised by economic growth, increasing stock market prices, and increasing house values.”

The study, based on a large administrative sample from Sweden covering the years 1968-2005, finds age-wealth probability patterns to be consistent with the life-cycle model of savings and wealth accumulation. Wealth first increases and then decreases, and the peak in the probability of being wealthy occurs when people are about 65 years old, the authors note. “This is close to the age when retiring for most.”

Interestingly, the probability of being wealthy is higher when households experience high income uncertainty, one learns. This is consistent with precautionary motives for savings and wealth accumulation, although effects are small, reason the authors.

Of educative value about wealth movements across generations.