Essays in corporate governance

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This thesis is composed of three chapters. In the first chapter, I analyze the effect of change in product market competition on board composition and evaluate its consequences on firm performance. Using industry-specific exogenous changes in product market competition, I test whether firms respond to changes in the demand for board independence. I find that firms decrease their level of board independence by 5.52 percentage points in response to an increase in product market competition. Moreover, by exploiting the 2003 NYSE and NASDAQ rulings in a triple-difference design, I show that constraint on firm’s ability to adjust its board structure in response to changes in competition has negative consequences on its performance; firms which are constrained by the regulation to reduce their board independence experience a 10.5 percentage points lower return on assets (ROA) compared to unconstrained firms. This suggests that the decrease in board independence is in the interest of shareholders. By showing that regulation may actually harm some firms, the analysis sheds light on the costs of “one size fits all” governance regulations. In the second chapter, I shed light on the political ideology of the CEO as an important determinant of firm performance. Using individual campaign contribution data, I measure the political ideology of U.S. CEOs over the period 1994 to 2014 and analyze the relation between CEO ideology and firm performance. To identify the causal effect of CEO ideology, I use a combination of time-varying effects and novel instruments based on the ideology of the pool of potential CEO hires. Across all specifications, I find that firms with Republican CEOs, on average, 6 percentage point higher ROA compared to firms with Democrat CEOs. Several alternate explanations such as time varying differences at state-industry level, political connections and firm fixed effects do not explain away the results. In the third chapter, joint work with Antonio Vazquez Lopez (UC3M), we test whether focal firms whose CEOs sit on multiple boards can suffer decreases in performance due to transient attention-grabbing events in firms where CEOs sit as independent directors. We exploit extreme returns (positive and negative), extreme earnings and extreme volatility in firms where CEOs sit as independent directors and find that such distraction leads to an average decrease of approximately 1% of focal firm’s ROA, Q, market returns and ROE. This effect is stronger for focal firms that are geographically more distant to firms where CEOs sit as independent directors, which suggests that distraction is costlier in such situations. Additionally, we show that distraction is greater for CEOs that sit on the audit committee or chair a major sub-committee. Finally, we show that these distraction events also lead to lower CEO compensation and higher probability of forced turnover.
Corporate governance
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