Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

New Study Highlights Risks of Investing in Nevada-Based Companies

27.10.2011
Nevada has long been known for luring gamblers. Now it turns out the state may be luring unwitting investors into more of a gamble than they bargained for.

According to a study recently released by University of Virginia Professors Michal Barzuza and David C. Smith, publicly held companies incorporated in Nevada are forced to restate their financial results—that is, amend flawed corporate financial reporting—at a rate 40 percent higher than the national average.

Moreover, when such restatements occur, the market tends to punish Nevada-based companies far more harshly than it does companies incorporated in other states: Nevada companies that restate their financials experience a decline in stock price seven times greater than restating firms incorporated in other states.

“We’ve shown that if you hold stock in Nevada-incorporated companies, it’s much more likely that the company you hold will restate, and if that happens, the market-inflicted penalty is going to be higher than it would be for other states,” says Smith, C. Coleman McGehee Research Associate Professor of Banking and Commerce at UVA’s McIntire School of Commerce. “Put those two together, and holding a Nevada-based company looks pretty risky.”

Short arm of the law. The reason for the Nevada difference? According to the study, Nevada companies’ tendency to get the numbers wrong seems to be linked to legal changes adopted by the state a decade ago. In an effort to attract more companies to incorporate in the Silver State, Nevada enacted sweeping legislation designed to protect corporate managers and directors by indemnifying them against legal actions by shareholders. “Nevada law protects managers in a way that other states’ laws really don’t,” says Barzuza, Caddell & Chapman Professor of Law at the University of Virginia School of Law. “The Nevada secretary of state’s Web site highlights those differences as a marketing point.”

Remarkably, Barzuza explains, Nevada—in a single day—eliminated most of the liability that corporate executives and officers are exposed to in other states. “Directors no longer have liability for breaches of duty of faith or loyalty,” she says. “They’re liable only through a narrow category, which is intentional misconduct or knowing violation of the law.”

Nevada law is also markedly deferential to managers. Nevada-based companies are protected against so-called “Revlon duties” (management’s legal obligation, in the case of a company’s imminent breakup, to take the higher of two takeover offers) and generally face no legal ramifications when they use defensive tactics against hostile takeovers.

Selection effect. The result of such legislation, says Smith, is a situation of significantly compromised transparency. “When you set up laws that put a giant wall between officers, directors, and shareholders, it can be very hard to even figure out whether or not criminal activity is occurring,” he says.

The problem with such a situation, Barzuza and Smith say, is that some companies may be drawn to precisely such opaque conditions. “Nevada’s corporate legislation represents an important phenomenon,” Barzuza says, “because it means that there’s a new place for problematic companies to go.” Indeed, she says, a somewhat alarming selection effect seems to be occurring. “From our research, it looks like problematic companies—companies that could really benefit from regulation the most—are going to Nevada.”

For more information, contact David C. Smith (434-243-2272; dcs8f@virginia.edu) or Michal Barzuza (mbarzuza@virginia.edu; 434-924-7810).

David C. Smith | Newswise Science News
Further information:
http://www.virginia.edu

More articles from Studies and Analyses:

nachricht WAKE-UP provides new treatment option for stroke patients | International study led by UKE
17.05.2018 | Universitätsklinikum Hamburg-Eppendorf

nachricht First form of therapy for childhood dementia CLN2 developed
25.04.2018 | Universitätsklinikum Hamburg-Eppendorf

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: LZH showcases laser material processing of tomorrow at the LASYS 2018

At the LASYS 2018, from June 5th to 7th, the Laser Zentrum Hannover e.V. (LZH) will be showcasing processes for the laser material processing of tomorrow in hall 4 at stand 4E75. With blown bomb shells the LZH will present first results of a research project on civil security.

At this year's LASYS, the LZH will exhibit light-based processes such as cutting, welding, ablation and structuring as well as additive manufacturing for...

Im Focus: Self-illuminating pixels for a new display generation

There are videos on the internet that can make one marvel at technology. For example, a smartphone is casually bent around the arm or a thin-film display is rolled in all directions and with almost every diameter. From the user's point of view, this looks fantastic. From a professional point of view, however, the question arises: Is that already possible?

At Display Week 2018, scientists from the Fraunhofer Institute for Applied Polymer Research IAP will be demonstrating today’s technological possibilities and...

Im Focus: Explanation for puzzling quantum oscillations has been found

So-called quantum many-body scars allow quantum systems to stay out of equilibrium much longer, explaining experiment | Study published in Nature Physics

Recently, researchers from Harvard and MIT succeeded in trapping a record 53 atoms and individually controlling their quantum state, realizing what is called a...

Im Focus: Dozens of binaries from Milky Way's globular clusters could be detectable by LISA

Next-generation gravitational wave detector in space will complement LIGO on Earth

The historic first detection of gravitational waves from colliding black holes far outside our galaxy opened a new window to understanding the universe. A...

Im Focus: Entangled atoms shine in unison

A team led by Austrian experimental physicist Rainer Blatt has succeeded in characterizing the quantum entanglement of two spatially separated atoms by observing their light emission. This fundamental demonstration could lead to the development of highly sensitive optical gradiometers for the precise measurement of the gravitational field or the earth's magnetic field.

The age of quantum technology has long been heralded. Decades of research into the quantum world have led to the development of methods that make it possible...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Save the date: Forum European Neuroscience – 07-11 July 2018 in Berlin, Germany

02.05.2018 | Event News

Invitation to the upcoming "Current Topics in Bioinformatics: Big Data in Genomics and Medicine"

13.04.2018 | Event News

Unique scope of UV LED technologies and applications presented in Berlin: ICULTA-2018

12.04.2018 | Event News

 
Latest News

Research reveals how order first appears in liquid crystals

23.05.2018 | Life Sciences

Space-like gravity weakens biochemical signals in muscle formation

23.05.2018 | Life Sciences

NIST puts the optical microscope under the microscope to achieve atomic accuracy

23.05.2018 | Physics and Astronomy

VideoLinks
Science & Research
Overview of more VideoLinks >>>