Essays in Corporate Finance and Governance

Abstract

This dissertation consists of three essays in corporate governance. The first essay examines the effects of exogenous CEO health shocks on firm performance and corporate decisions. I build a hand-collected data set of incumbent CEO accident, illness, and disease events. The results demonstrate that CEO health shocks have a negative effect on firm performance, whether the CEO departs as a result of the event or stays with the firm. In sub-sample analysis of CEOs who continue with their careers, I find a persistent change in within-manager behavior: CEOs who experience significant health shocks adopt more conservative corporate policies. This contributes the CEO managerial style literature and provides evidence that CEO style varies across tenure. The second and third essays examine different aspects of CEO succession planning. The second essay examines the impact of CEO succession planning during CEO turnover events. To isolate the value of firm succession plans, I use the sudden death of CEOs as a natural experiment. Firms with succession plans have positive announcement effects and higher firm performance following the turnover event and these effects are significant economically. I find evidence that firms with succession plans are less likely to appoint COOs or interim CEOs and make appointments from a larger section of the CEO labor market. These results highlight the economic importance of CEO succession planning as part of the board’s monitoring function.

The third essay examines the factors affecting the likelihood of a firm having a CEO succession plan. I document a causal relationship between director experience and firm adoption of succession plans. To examine the effects of director experience, I study directors who have multiple directorships; I use only experience acquired from other firms after the director joined the current firm. This identification accounts for selection concerns by exploiting the exogenous variation in director experience. In a series of additional tests, I find a negative association with CEO power and a positive association with peer firms and the adoption of succession plans.