ESSAYS IN CORPORATE FINANCE

Abstract

My dissertation consists of three chapters that explore various aspects of corporate finance with a focus on issues related to corporate governance. Chapter 1 investigates how CEO bargaining power affects the level of CEO compensation. Contracting theories predict that CEO power plays an essential role in the pay-setting process. I provide causal empirical evidence of how changes in the bargaining power of CEOs affect the level of CEO compensation. Using the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by US state courts as an exogenous shock to CEOs’ bargaining power, I find that the recognition of the IDD results in significantly lower levels of CEO compensation. The effect is present only in subsamples of firms whose CEOs experience a substantial decline in their bargaining power. These results support the idea that bargaining power is the channel through which the IDD recognition decreases CEO compensation. Economic impact of the IDD is also substantial in the subsamples, ranging from 16.4% to 20.5% decline in total compensation. Examination of the structure of compensation reveals that changes in the bargaining power of CEOs reduce total current compensation and option awards. The recognition of the IDD also increases turnover-performance sensitivity and shareholder wealth. Chapter 2 examines the impact of corporate religious culture on CEO compensation structure. Recent studies document the effect of corporate culture on corporate behavior. This study examines how a firm’s religious culture affects the structure of CEO compensation. Using county-level religiosity as a proxy for a firm’s culture, I find that firms in highly religious counties use about 12.4% less performance-based compensation in their CEO compensation packages. I consider two characteristics of religious cultures that are likely to have implications on executive compensation: extrinsic motivation and locus of control. To determine which characteristic is driving the results, I examine how turnover decisions differ depending on religious culture of firms. If locus of control – the extent to which human effort can affect future outcomes – is driving the main result, less turnover-performance sensitivity is expected in highly religious firms. The results show that turnover-performance sensitivity does not vary according to county-level religiosity, suggesting that locus of control is not the driver behind the main result. These findings indicate that firms with highly religious cultures use less performance-based compensation because religious cultures’ work ethic is less financially motivated. Lastly, Chapter 3 investigates how insider-dominance of corporate boards affect firm value. The agency literature posits that insider-dominated boards are likely to face severe agency problems. However, some theories on board control argue that insider-dominated boards are sometimes optimal for shareholders. I evaluate the theories using SOX-related board reforms in the early 2000s that presented an exogenous change in board control. Specifically, I analyze the heterogenous treatment effects based on firm characteristics that theoretically favor insider-dominated boards – firm size, proprietary knowledge, and information transparency. Preliminary results suggest that firms with theoretically optimal insider-dominated boards experienced a net increase in shareholder value when boards became independent. These results indicate that benefits of enhanced monitoring by independent boards outweighed any loss in value associated with insider control of the board.