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 Win-win strategies for climate and food security
02.10.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht The personality factor: How to foster the sharing of research data
06.09.2017 | ZBW – Leibniz-Informationszentrum Wirtschaft

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: Salmonella as a tumour medication

HZI researchers developed a bacterial strain that can be used in cancer therapy

Salmonellae are dangerous pathogens that enter the body via contaminated food and can cause severe infections. But these bacteria are also known to target...

Im Focus: Neutron star merger directly observed for the first time

University of Maryland researchers contribute to historic detection of gravitational waves and light created by event

On August 17, 2017, at 12:41:04 UTC, scientists made the first direct observation of a merger between two neutron stars--the dense, collapsed cores that remain...

Im Focus: Breaking: the first light from two neutron stars merging

Seven new papers describe the first-ever detection of light from a gravitational wave source. The event, caused by two neutron stars colliding and merging together, was dubbed GW170817 because it sent ripples through space-time that reached Earth on 2017 August 17. Around the world, hundreds of excited astronomers mobilized quickly and were able to observe the event using numerous telescopes, providing a wealth of new data.

Previous detections of gravitational waves have all involved the merger of two black holes, a feat that won the 2017 Nobel Prize in Physics earlier this month....

Im Focus: Smart sensors for efficient processes

Material defects in end products can quickly result in failures in many areas of industry, and have a massive impact on the safe use of their products. This is why, in the field of quality assurance, intelligent, nondestructive sensor systems play a key role. They allow testing components and parts in a rapid and cost-efficient manner without destroying the actual product or changing its surface. Experts from the Fraunhofer IZFP in Saarbrücken will be presenting two exhibits at the Blechexpo in Stuttgart from 7–10 November 2017 that allow fast, reliable, and automated characterization of materials and detection of defects (Hall 5, Booth 5306).

When quality testing uses time-consuming destructive test methods, it can result in enormous costs due to damaging or destroying the products. And given that...

Im Focus: Cold molecules on collision course

Using a new cooling technique MPQ scientists succeed at observing collisions in a dense beam of cold and slow dipolar molecules.

How do chemical reactions proceed at extremely low temperatures? The answer requires the investigation of molecular samples that are cold, dense, and slow at...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

3rd Symposium on Driving Simulation

23.10.2017 | Event News

ASEAN Member States discuss the future role of renewable energy

17.10.2017 | Event News

World Health Summit 2017: International experts set the course for the future of Global Health

10.10.2017 | Event News

 
Latest News

Microfluidics probe 'cholesterol' of the oil industry

23.10.2017 | Life Sciences

Gamma rays will reach beyond the limits of light

23.10.2017 | Physics and Astronomy

The end of pneumonia? New vaccine offers hope

23.10.2017 | Health and Medicine

VideoLinks
B2B-VideoLinks
More VideoLinks >>>