Three Essays in Corporate Finance
This Ph.D. dissertation studies corporate finance and consists of three chapters. The first chapter examines the value of a firm's board political capital by identifying professional and social ties of top executive branch officials and corporate directors in the United States. Using the close 2008 Democratic presidential primaries between Hillary Clinton and Barack Obama as repeated shocks to board political capital, I find that director network ties to politicians significantly enhance shareholder value. Firms connected to the winning candidate experience a 1.4% higher abnormal return relative to non-winner-connected firms. Further, I show that one channel of value creation is through an improved likelihood of merger completions and higher merger returns. Overall, my study shows that less visible political ties can allow firms to extract significant rents even in a low corruption environment.The second chapter studies how the existence of an important production contract affects the choice of CEO compensation contract. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives, leading to lower option-based compensation. Using import tariff cuts as exogenous shocks to customer relationships, we find firms with major customers significantly reduce CEO option-based compensation following tariff reductions. We also document that following tariff cuts, the value of these relationships as well as the firm itself significantly decline in response to higher option compensation. Our study provides new insights into how important stakeholders shape executive compensation decisions.The last chapter examines whether shareholder attention improves director incentives. Using exogenous industry shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors using their votes, while directors with poor proxy voting outcomes are less likely to depart. Consequently, independent directors face weaker monitoring incentives and exhibit poor performance. Also, ineffective independent directors are more frequently appointed. Such firms exhibit more earnings management, high unexplained CEO pay, and lower valuation. Overall, our findings suggest that institutional investor attention significantly strengthens director monitoring incentives and board governance.
