Three essays in corporate governance

Abstract

This thesis consists of three independent essays which focus on agency conflicts and the role of governance in mitigating such conflicts. The first essay exploits a quasi-natural experiment that imposes stricter restrictions on the executive’s mobility and uses a unique hand-collected dataset to examine the net effect of such restrictions on corporate policies. Firms managed by professional chief executive officers (CEOs) who depend more on outside employment options to diversify their career risks adopt suboptimal corporate policies after such stricter restrictions on mobility. The study uses an additional quasi-natural experiment where professional CEOs replace founder CEOs in exogenous turnovers. The study finds casual evidence that professional CEOs’ exacerbated career concerns aggravate risk-related agency conflicts and thus, influence corporate decisions systematically. This estimation has implications for public policy prescriptions regarding firm-level governance and the design of a flexible labor market that ensures allocational efficiency. The second essay uses a quasi-exogenous regulatory shock to analyze whether forced changes in board composition help to reign in powerful CEOs. The study finds that post-regulation, firms led by powerful CEOs initiate a strategic shift in resource allocation. Firms managed by powerful CEOs increase innovation inputs (R&D expenditures) and produce more innovation outputs (patents) that are scientifically more important and economically more valuable. Investment quality also improves, manifesting in better takeover performance. Such evidence suggests that firms with an independent board can balance executive power, force powerful CEOs to consider other opinions, and reign in value destruction. The third essay uses a unique hand-collected dataset on family ownership and family management of S&P500 firms and shows that firm performance is sensitive to the measurement of family ownership and founder CEO status. The study also documents that variation in the definition of a family-firm may modify the impact of family-firms on strategic investment decisions (Mergers & Acquisitions) and financing decisions. Overall, the findings highlight that the relationship between family-firms and corporate policy documented so far in the literature should be evaluated with caution, as such associations are sensitive to the measurement of family ownership and whether the CEO is the founder of the firm.