Essays on corporate governance
This dissertation consists of two essays. The essay "Shareholder Rights and CEO Compensation" analyzes the empirical relationship between shareholder rights and the compensation contracts of executives. Two opposite hypotheses of this relationship have been discussed in the literature: the incentive substitution hypothesis and the managerial entrenchment hypothesis. In the former, shareholders' ability to remove managers provides implicit incentives to managers. Weak shareholder rights reduce these incentives and should be offset by higher equity incentives or a lower level of compensation. In the entrenchment hypothesis, when it is more difficult for shareholders to replace the current executives, executives might be able to influence compensation packages in their favor. My empirical results support the entrenchment hypothesis. CEOs receive higher total compensation, a higher annual increase in compensation, and have smaller fractional ownership if the balance of power between shareholders and managers is tilted towards management. The results are robust to controlling for alternative governance mechanisms such as the size and independence of the board of directors and institutional ownership. The essay "Founder-CEOs and Stock Market Performance" studies large public firms that are still headed by the entrepreneur who founded the firm. Eleven percent of the largest public U.S. firms are headed by the CEO who founded the firm. Founder-CEO firms differ systematically from successor-CEO firms. They have a higher accounting performance and a higher firm valuation. Founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions. Moreover, an equal-weighted investment strategy that had invested in founder-CEO firms from 1993-2002 would have earned a benchmark-adjusted return of 8.3% annually. A value-weighted investment strategy would have earned an abnormal return of 10.7%. The excess return is robust; after controlling for a wide variety of firm characteristics, CEO characteristics, and industry affiliation, the abnormal return is still 4.4% annually.
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