ESSAYS ON EXECUTIVE COMPENSATION, CAPITAL STRUCTURE AND CORPORATE GOVERNANCE

This dissertation consists of three essays on the relation between executive compensation, capital structure and corporate governance. In the first essay, I examine the relation between CEO option compensation and firm capital structure. The empirical challenge in studying this relation is that these are both choices of the firm that are made simultaneously. Therefore, it is difficult to conclude from the existing literature the causation of this relation. Using the Internal Revenue Code (IRC) 162(m) tax law as an exogenous shock to the compensation structure in a natural experiment setting, I can identify now firm leverage changes as a result of the CEO option compensation changes. The evidence provides strong support for the debt agency theory. The results indicate that firms decrease leverage when CEOs are paid with more option grants and as those options become a higher percentage of the firm's future cash flows. The findings are robust to addition of corporate governance and convertible debt dimensions to estimation. The second essay studies the effect of internal board monitoring on the firm's debt maturity structure. I use the Sarbanes - Oxley Act of 2002 (SOX) and the Securities and Exchange Commission (SEC) regulations as exogenous shocks to board structure in a natural experiment setting. Supporting the agency theory, the findings indicate that firms have debt with longer maturity as board independence increases and internal board monitoring becomes powerful. The results are even stronger for complex and larger firms such as conglomerates. I find the relation between internal monitoring and debt maturity becomes less clear during times of financial instability. The third essay investigates the impact of externally mandated versus organically determined corporate governance modifications on firm performance. SOX and SEC regulations are employed as a natural experiment in order to examine the imposed rules and elucidate the identification issues. The findings suggest that companies which voluntarily determine the necessary corporate governance modifications based on firm specific characteristics and needs perform better than the case where they are all forced to alter their board structure

Do investors react differently? Evidence from hospitality sector during the Covid-19 pandemic

Focusing on publicly traded U.S. eating & dining and lodging firms from 01 July 2019 to 30 October2020, this paper examines investor reaction to restaurant and hotel firms throughout the Covid-19 pandemic. Results show that there is no consensus on buying or selling shares of different hospitality firms in the beginning. Consistent with the behavioral theory, the market reaction is mainly negative to restaurant firms matching with investors’ negative sentiments while investors are indifferent towards lodging firms. In later stages, investors trade less stocks, and the buy pressure in the market leads to a positive reaction to both types of firms

Cyber-attacks and stock market activity

I study how financial markets react to unexpected corporate security breaches in the short and the long-term. The main results show that daily excess returns drop, trading volume increases due to selling pressure, and liquidity improves upon the public disclosure of first-time corporate hacking events. The evidence from the search frequency in Google suggests that such short-lived market reaction is due to increasing investors' attention. Cyber-attacks affect firms' policies in the long run, up to 5 years after the security breach announcement. These results are consistent with the hypothesis that security breaches represent unexpected negative shocks to firms' reputations

Engaged ETFs and Firm Performance

ETFs have often tracked indices and charged low fees so their incentives to improve firm performance are questionable although little empirical work has investigated this issue. Theoretically, however, we expect firms to perform better when held by more engaged ETFs. We develop a new measure of engagement using a weighted-average concentration measure which captures the combined effect of the concentration of the portfolios of the ETFs investing in a firm and the ownership of the firm by those ETFs. Using ETFs’ investment in US-listed firms for the period 2000-2019, we confirm our expectations that more engaged ETFs improve firm performance

Growth ... What growth?

This study focuses on economic turmoil in the UK between 06September and 19October2022 consequent on a “mini budget” announced by the then Chancellor. Contrary to pre-announcement growth expectations, UK firms lost about 0.30% in daily excess returns and £0.87 million in market value. UK's “Moron Risk Premium” increased by 0.48%. Analyses with Google Search Volume Index support this devastating effect on companies. Durables, construction, manufacturing, and wholesale & retail sectors were less affected by this economic turbulence. We concluded that the announced low-tax economic policy does not always convince markets of future growth, particularly during high inflation and political instability

Benefit corporation certification and financial performance: Capital structure matters

We are examining the impact of benefit corporation certification on the profitability of UK companies, taking into account their capital structure. We contribute to the literature that scrutinizes the financial ramifications of Benefit Corporation Certification. Analyzing UK Certified Benefit Corporations (CBCs) and their noncertified counterparts using a difference-in-differences analysis, we find that the performance of CBCs with a capital structure heavily weighted towards debt declines in comparison to non-CBCs, using Return on Assets as a measure of financial performance. Conversely, the performance of CBCs with a capital structure primarily composed of equity is comparable to that of non-CBCs

Learning financial survival from disasters

This study examines how firms learn financial survival from experience, and how stock markets price this learning. We study American firms during the Covid turmoil which had prior exposure to the 2008 Global Financial Crisis. Our results show firms exposed to the 2008 Crisis had 95% higher monthly stock returns during Covid compared to their unexposed peers. This highlights the role major crises play in shaping organisational resilience. The organisational learning we illustrate includes a strong element of CEO learning but is not exclusive to senior management. Our empirical findings are stronger for firms in ‘shutdown sectors’ and persist after controlling for state interventions, as well as other control factors and estimation windows

Staring death in the face: the financial impact of corporate exposure to prior disasters

We examine how firms’ exposure to prior disastrous events can influence their stock market footprint during the coronavirus crisis. While others have drawn comparisons between past pandemics and Covid-19, we argue that such comparisons are skewed due to the unprecedented reach and consequences of the latter. To better model the structural shock caused by Covid-19 in the USA, we look at the 9/11 terrorist attacks and specifically examine how firms based in New York City back then reacted to the associated financial turmoil. While 9/11 and Covid-19 are categorically different events, their short-term impacts on the stock market, and on New York exchanges in particular, are surprisingly similar. We find firms that financially ‘survived’ 9/11 also managed to do better – or suffer less – by about 7% in terms of stock returns during Covid-19, compared to control firms that were not exposed to 9/11. In a sense, we show that companies’ prior exposure to 9/11 partly ‘immunized’ them against the consequences of a similarly destabilizing event, albeit two decades later. Interestingly, the trading volume of exposed firms increased due to market buying pressures. Our analysis is robust to various financial proxies, alternative definitions of control firms and varying estimation windows

The role of gender in sales behaviour: Evidence from institutional financial brokerage

We study the role of gender in sales behaviour using 336,401 daily institutional broker transactions over two years. Female brokers appear more efficient at generating revenue than males. Their more cautious sales behaviour sees them execute fewer transactions and sell lower risk financial products to more conservative clients. Directionally supportive of literature that records higher confidence levels, trading frequency and risk taking among males, we show how female brokers contribute to more diversified and successful sales behaviour. Our findings are relevant to gender unequal financial services industry and other quantitative domains that tend to overvalue male relative to female skills

Changes in corporate governance: externally dictated vs voluntarily determined

Using the 2003 SEC regulations (following the Sarbanes–Oxley Act) on board independence as an identification for externally imposed governance changes, I compare its influence on firm performance to the effect of voluntarily conducted adjustments. I use publicly listed US firms between 1998 and 2009. In a triple-difference (dif-in-dif-in-dif) analysis setting, I explicitly interact the dictated change in board independence with the identifiers of the shock and non-compliant firms. Controlling for companies with voluntary changes, firms forced to modify their governance by increasing board independence experience a decrease in ROA, asset turnover, and sales growth. Testing the joint influence of dictated and voluntary adjustments in board independence on performance through a cross-sectional logistic-regression model, and controlling further for potential endogeneity through an instrumental variable (IV) regression model, I obtain consistent results. The findings are robust for other mandated provisions and stronger for bigger changes; small, single-segment firms operating in wholesale, retail, and high-tech industries; and constrained companies with financial distress, high leverage, low cash, high volatility, high growth and R&D expenses