Corporate Derivatives as a Manager-Specific Investment

This study examines one manager-specific investment, the use of derivatives, and the corresponding market for corporate control. We find firms with large derivatives positions or increases in their unrealized derivatives gains are associated with a significantly lower likelihood of being the target of an acquisition. We further find firms with greater magnitude of derivatives are associated with weaker boards. Consistent with derivatives being used by managers to protect themselves from disciplinary forces, we find the absolute size of firms’ unrealized derivatives value is negatively associated with firm value. Finally, firms with decreasing (increasing) idiosyncratic risk as well as increasing (decreasing) absolute value of changes in derivatives realized gains and losses, exhibit a decreasing (increasing) likelihood of takeovers. In summary, the findings are consistent with derivatives being an example of a manager-specific investment (Shleifer and Vishny (1989)) that is successful at entrenching management

Female directors: Why are some less informed than others?

We find the limited supply of female directors, rather than gender differences or boardroom biases, can create an informational disadvantage for some female independent directors, as measured by their open market trading profits. The information disparity is largely isolated to firms with abnormally low representation by female directors. Female independent directors who are located further away from the company’s headquarters, have less industry experience or have shorter tenure exhibit the most limited information access. Accounting for these obstacles reduces the gender disparity in information. We further find that this information disparity among female independent directors contributes to the variation in their influence on board monitoring. More informed female independent directors are associated with fewer restatements, lower abnormal CEO compensation and higher Tobin’s Q. Our results have several policy implications

Three essays in executive compensation

In essay one, we examine overconfident CEO-directors and find they attend more board meetings, are more active in nominating committees, and have more independent directorships. Attendance is higher when multiple overconfident directors are present on the board. When an overconfident board selects a new CEO after a CEO turnover, they are more likely to appoint a better prepared and more reputable CEO. Overconfident boards are also more likely to select an overconfident CEO. We also find overconfident boards exacerbate the restrained use of debt when an overconfident CEO is present, and we find evidence that the association between CEO-directors and greater CEO pay is driven solely by overconfident CEO-directors on the board. This evidence indicates overconfident CEO-directors exhibit significant influence on the board and over the firm's CEO. In essay two, I analyze the CEO incentives of inside debt in the form of deferred equity compensation in the context of M&A decisions. CEO inside debt holdings are negatively associated with the likelihood of the firm engaging in an M&A. When firms with higher levels of CEO inside debt decide to engage in an acquisition, those acquisitions are non-diversifying, relatively smaller deals, and are paid using a greater portion of stock. The evidence indicates that inside debt incentivizes CEOs to make less risky decisions for the benefit of debt holders and at the expense of shareholders. In essay three, I analyze both CEO inside debt and firm debt jointly to further investigate compensation incentives of risky decision-making and the resulting financial policy decisions concerning the debt structure of the firm. I find larger firms with high CEO inside debt tend to diversify, as calculated by the Herfindahl-Hirschman index of debt type usage. These types of firms use a higher percentage of term loans and other debt but a lower percentage of drawn credit lines and commercial loans. Larger firms with high CEO inside debt have lower interest rates on these debt instruments and shorter maturities, suggesting a more conservative financing policy with regards to debt. (Published By University of Alabama Libraries

Three essays in corporate finance

The dissertation contains three essays in corporate finance. The first essay examines to what extent shareholder gain from activism is the result of wealth transfer from employees of a firm targeted by activism. My baseline results show that target firms experience underfunding in defined benefit employee pension plans after acts of activism. My evidence suggests that the underlying mechanism of this wealth transfer is the agency conflicts between CEO-shareholder alliance and CEO-worker alliance. My identification strategy is to examine possible alternative explanations. My various tests reject alternative hypothesis such as sample attrition, management’s voluntary reforms, activists stock-picking skills, and the changes due to mean reversion. I also find that target firms experience funding shortfalls after activism. It appears that the underlying mechanism is the degree of managers’ entrenchment. Entrenched managers tend to create a worker-management alliance using employee stock ownership. Consistent with this hypothesis, target firms with employee stock ownership in the own company are less likely to experience funding shortfall. In the second essay, analyzing texts in Schedule 13D filings, I address important questions regarding shareholder activism: which forms of activism increases firm value and under what circumstances? I show that investors respond more positively to activist shareholders who use soft activism, communicating with their target firms’ managers or other shareholders rather than a harder approach. Overall, I provide empirical evidence that soft shareholder activism is value-enhancing. In the third essay, I show that a local culture of altruism influences corporate social responsibility (CSR). I measure the level of local altruism by the amount of contributions to charitable, educational, religious organizations, and other cash gifts. I find evidence of a positive relation between local altruism and CSR scores of firms headquartered in a US county. I also find that increased CSR concerns of firms headquartered near altruistic communities have a negative impact on stock returns. Overall, my empirical evidence shows that local culture affects firms’ CSR polices and investors who invest in companies located in altruistic communities react more to the increase in concerns than increase in strengths of CSR. (Published By University of Alabama Libraries

Three essays on more powerful unit root tests with non-normal errors

This dissertation is concerned with finding ways to improve the power of unit root tests. This dissertation consists of three essays. In the first essay, we extends the Lagrange Multiplier (LM) unit toot tests of Schmidt and Phillips (1992) to utilize information contained in non-normal errors. The new tests adopt the Residual Augmented Least Squares (RALS) estimation procedure of Im and Schmidt (2008). This essay complements the work of Im, Lee and Tieslau (2012) who adopt the RALS procedure for DF-based tests. This essay provides the relevant asymptotic distribution and the corresponding critical values of the new tests. The RALS-LM tests show improved power over the RALS-DF tests. Moreover, the main advantage of the RALS-LM tests lies in the invariance feature that the distribution does not depend on the nuisance parameter in the presence of level-breaks. The second essay tests the Prebisch-Singer hypothesis by examining paths of primary commodity prices which are known to exhibit multiple structural breaks. In order to examine the issue more properly, we first suggest new unit root tests that can allow for structural breaks in both the intercept and the slope. Then, we adopt the RALS procedure to gain much improved power when the error term follows a non-normal distribution. Since the suggested test is more powerful and free of nuisance parameters, rejection of the null can be considered as more accurate evidence of stationarity. We apply the new test on the recently extended Grilli and Yang index of 24 commodity series from 1900 to 2007. The empirical findings provide significant evidence to support that primary commodity prices are stationary with one or two trend breaks. However, compared with past studies, they provide even weaker evidence to support the Prebisch-Singer hypothesis. The third essay extends the Fourier Lagrange Multiplier (FLM) unit root tests of Enders and Lee (2012a) by using the RALS estimation procedure of Im and Schmidt (2008). While the F\LM type of tests can be used to control for smooth structural breaks of an unknown functional form, the RALS procedure can utilize additional higher-moment information contained in non-normal errors. For these new tests, knowledge of the underlying type of non-normal distribution of the error term or the precise functional form of the structure breaks is not required. Our simulation results demonstrate significant power gains over the FLM tests in the presence of non-normal errors. (Published By University of Alabama Libraries

Executive political preferences and corporate decisions and outcomes

Corporate decisions and policies made by executives have real effects on the financial valuation of firms. Therefore, the behavior of executives, including underlying causes and subsequent implications, is important in the study of finance. This dissertation investigates executive behavior by examining how the political preferences of executives affect their corporate decisions and the subsequent outcomes. The first essay focuses on the impact of executive political preferences on mergers. Using a rare and hand-collected dataset of executive political donations and CEO retention following mergers, I investigate how shared political preferences between executives of merging firms affect the probability of a merger and subsequent merger outcomes. The second essay focuses on how CEO political preferences affect firm policies and market distribution. In this paper, I use the dataset of executive political donations to examine if Republican-led firms have less risky policies, such as less use of earnings management and lower likelihood of restating earnings. I also test if these less risky policies by Republican managers result in less risky stock return distributions for their firms. (Published By University of Alabama Libraries

Essays on unconventional monetary policy

This dissertation is comprised of three essays in which we provide a theoretical framework to study the transmission mechanism of unconventional monetary policy on real activity and credit markets under differing degrees of banking sector concentration. In particular, the three chapters in this dissertation focus on expansionary balance ­sheet policies consisting of long­-term asset purchases by a central bank. The overall results indicate that such expansionary policies stimulate economic activity in the form of capital formation, increased credit volume and financial easing under low short-­term interest rate economies when the financial sector is perfectly competitive. However, when the banking sector is fully concentrated, the transmission mechanism of monetary policy can be distorted and thus the impact of a long-term security purchase program is hampered. Our results also suggest that the fiscal authority as well as the industrial organization of the banking sector play fundamental roles in the transmission mechanism of unconventional monetary policy. (Published By University of Alabama Libraries

Three essays on the legal environment, corporate policy and governance

This dissertation consists of three essays on the legal environment, corporate policy and corporate governance. The dissertation research seeks to contribute to a new understanding of the relationship between the legal environment, corporate behavior and corporate governance. In the first essay, we use a unique hand-collected dataset on corporate subsidiaries and lawsuits to examine the relationship between litigation risk and subsidiary usage by large U.S. corporations. We find that firms, in general, tend to have a large number of subsidiaries when exposed to high litigation risk. Dividing the sample into financially distressed and financially healthy sub-samples, we find that financially distressed firms tend to have a large number of subsidiaries when exposed to high litigation risk, while this tendency is less pronounced in financially healthy firms. High severity litigation risk matters more than low severity litigation risk. The results are consistent with the prediction of theoretical models. Taken together, they bring to light an efficient link between litigation risk and subsidiary usage. The second essay empirically examines the relationship between litigation risk and key financial and investment policy choices. We use a unique hand-collected database on corporate lawsuits as a proxy to measure litigation risk. The key financial and investment policies we investigate include: the levels of financial leverage, cash holdings, and capital expenditures. After controlling for other determinants of corporate financial and investment policies, we find a negative relationship between litigation risk and financial leverage. We also find a positive relationship between the level of cash holdings and securities and intellectual property litigation. In addition, we document a negative relationship between the level of cash holdings and high severity litigation risk in general, and government contracts, corporate governance, and employment and labor litigation, in particular. Furthermore, we find a positive relationship between litigation risk and the level of capital expenditures. Partitioning the sample into unified and parent-subsidiary firms, we find that relative to high litigation risk firms with a unified corporate structure, high litigation risk firms with parent-subsidiary structures have significantly higher levels of financial leverage and cash holdings, and lower level of capital expenditures. Thus, corporate organizational form appears to be a clear substitute for financial policy in responding to litigation risk. Taken together, these results highlight a link between litigation risk and corporate financial and investment policy choices. In Essay three, we examine the effects of board structure on corporate litigation. Using a unique hand-collected dataset on corporate lawsuits and the 2002 NYSE/NASDAQ exchange listing requirements on board independence as an exogenous shock, with the difference-in-difference methodology, we empirically examine how an increase in the percentage of independent directors on boards affects a wide variety of corporate litigation. We find that an exogenous increase in the percentage of independent directors on a board is associated with a significant decrease in corporate litigation. In addition, the results are stronger in industries where the exposure to the various types of corporate litigation is greater. These findings provide evidence of the effective monitoring role of independent directors. (Published By University of Alabama Libraries