My dissertation consists of three essays on Corporate Governance. The first essay studies a situation where corporate governance assumes importance because the manager and shareholders may disagree about optimal decisions due to heterogeneous prior beliefs. An important contribution of the essay is to characterize the optimal governance arrangement in such situations and to highlight the optimality of joint control. We apply our theory to an entrepreneur/manager's choice between private and public ownership and derive a number of testable predictions. The second essay investigates the importance of reputation concern as a governance mechanism. Specifically we study this in the context of Indian Business Groups. We use the first bankruptcy of a group firm to identify an event leading to loss of group reputation. We show that groups use intra-group loans to support member firms in financial distress and avoid a reputation loss. Firms belonging to groups with unimpaired reputation are less likely to become bankrupt. The first bankruptcy in a group is followed by a significant drop in the amount of external finance raised, a discontinuous drop in investments and profits, and an increase in the bankruptcy probability of other healthy firms in the group. In the last essay, I highlight an alternate way in which large institutional shareholders can influence firm governance. I show that large shareholders can influence governance both when they become activist and also when they sell their shares. Selling depresses the stock price, increases stock liquidity and facilitates takeovers. I highlight this mechanism in a model and test the main predictions using institutional trading data on firms that undertake large acquisitions. Using acquisitions to identify firms with potential agency problems, I relate the largest institutional block holder's trading in the post acquisition period to firm performance and subsequent changes in firm governance. The main results are that the block holder selling increases takeover probability by over 35% and the block holder is aware of the takeover possibility and trades in response.Ph.D.FinanceManagementSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/126036/2/3224888.pd
