Two essays in corporate finance
In the first chapter, using a dynamic agency model, I examine the allocation of control rights between a wealth-constrained entrepreneur and a venture capitalist when they write a contract for investment in a new venture. Through time and due to the absence of success in the venture, a learning process provides a reassessment of the quality of the entrepreneur's project. As the assessment of the project deteriorates, the venture capitalist, concerned about the entrepreneur's incentive to extract the funds into her private ends, demands more control. More control rights for the venture capitalist help prevent the entrepreneur from diverting the funds. Ultimately the funding stops prematurely as no contract can satisfy both the venture capitalist's participation constraint and the entrepreneur's incentive constraint at the same time. I also show lower proceeds and a higher funding volume in the venture, lower private benefits of control for the entrepreneur, and a lower discount rate all increase the severity of the entrepreneur's incentive constraint and lead to more control for the venture capitalist. In the second chapter, I examine the timing of executive stock option awards to investigate the influence of managers over the terms of their compensation. In a sample of 11,503 option awards to CEOs of 2,129 companies between 1992 and 2000, I find an average cumulative abnormal return of -2.5% during 60 trading days before CEOs receive option grants and an average cumulative abnormal return of 3% in 90 trading days following the option grants. This pattern considerably increases the value of the grants because options are granted with a strike price set to the stock price on the award date. I also find that the CEOs of companies with smaller size, higher stock price volatility, and more flexible schedule for granting option awards, consistently benefit a more favorable timing for their awards. Moreover, my findings in the analyses of earnings, dividends and stock splits announcements surrounding the award dates support the main hypothesis that CEOs receive their option awards after unfavorable news that pushes stock prices lower and shortly in advance of favorable news that pushes stock prices higher.
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