Three essays on director incentives and behavior

Abstract

This dissertation examines the incentives and behavior of the directors of public companies. Boards of directors act as the agents of shareholders and are expected to both monitor and advise managers. Yet, there are obvious conflicts of interest between directors and shareholders that raise doubts on whether directors have sufficient incentives to fulfil their obligations. The existing literature is full of examples that directors in certain situations can have certain perverse incentives that can hurt shareholder wealth. For instance, when directors anticipate the firm to experience negative performance shocks, they may be incentivized to leave the firm immediately to avoid reputational damage and an increase in workload. The first study in this dissertation examines the consequences for directors who leave a firm before the firm experiences certain negative events. I show that directors who leave prior to negative events suffer stronger labor market penalties than directors who persevere through such events. The second study asks the question why independent directors are willing to join poorly performing firms. In this chapter I show that directors who join these firms do not appear to be poor quality directors. In fact, they are more likely to obtain powerful positions on the new boards, which can be one source of the incentives to join troubled firms. The third study in this dissertation examines how director incentive changes when they pledge their company stock as collateral for a margin loan. I document a negative causal relationship between firm value and pledging. I identify two channels via which such value destruction occurs. First, margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, pledging is followed by changes in corporate policies that are consistent with greater insider risk aversion. Overall, this dissertation contributes to the literature on director incentives by examining several issues that have been relatively unexplored.