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 Some brain tumors may respond to immunotherapy, new study suggests
11.12.2018 | Columbia University Irving Medical Center

nachricht Climate change and air pollution damaging health and causing millions of premature deaths
30.11.2018 | International Institute for Applied Systems Analysis (IIASA)

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: Data use draining your battery? Tiny device to speed up memory while also saving power

The more objects we make "smart," from watches to entire buildings, the greater the need for these devices to store and retrieve massive amounts of data quickly without consuming too much power.

Millions of new memory cells could be part of a computer chip and provide that speed and energy savings, thanks to the discovery of a previously unobserved...

Im Focus: An energy-efficient way to stay warm: Sew high-tech heating patches to your clothes

Personal patches could reduce energy waste in buildings, Rutgers-led study says

What if, instead of turning up the thermostat, you could warm up with high-tech, flexible patches sewn into your clothes - while significantly reducing your...

Im Focus: Lethal combination: Drug cocktail turns off the juice to cancer cells

A widely used diabetes medication combined with an antihypertensive drug specifically inhibits tumor growth – this was discovered by researchers from the University of Basel’s Biozentrum two years ago. In a follow-up study, recently published in “Cell Reports”, the scientists report that this drug cocktail induces cancer cell death by switching off their energy supply.

The widely used anti-diabetes drug metformin not only reduces blood sugar but also has an anti-cancer effect. However, the metformin dose commonly used in the...

Im Focus: New Foldable Drone Flies through Narrow Holes in Rescue Missions

A research team from the University of Zurich has developed a new drone that can retract its propeller arms in flight and make itself small to fit through narrow gaps and holes. This is particularly useful when searching for victims of natural disasters.

Inspecting a damaged building after an earthquake or during a fire is exactly the kind of job that human rescuers would like drones to do for them. A flying...

Im Focus: Topological material switched off and on for the first time

Key advance for future topological transistors

Over the last decade, there has been much excitement about the discovery, recognised by the Nobel Prize in Physics only two years ago, that there are two types...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

ICTM Conference 2019: Digitization emerges as an engineering trend for turbomachinery construction

12.12.2018 | Event News

New Plastics Economy Investor Forum - Meeting Point for Innovations

10.12.2018 | Event News

EGU 2019 meeting: Media registration now open

06.12.2018 | Event News

 
Latest News

Data use draining your battery? Tiny device to speed up memory while also saving power

14.12.2018 | Power and Electrical Engineering

Tangled magnetic fields power cosmic particle accelerators

14.12.2018 | Physics and Astronomy

In search of missing worlds, Hubble finds a fast evaporating exoplanet

14.12.2018 | Physics and Astronomy

VideoLinks
Science & Research
Overview of more VideoLinks >>>