Essays In Corporate Finance And Corporate Governance
De Angelis, David
My dissertation contains three essays in corporate finance and corporate governance. The first essay studies the effect of information frictions across corporate hierarchies on internal capital allocation decisions, using the Sarbanes Oxley Act (SOX) as a quasi-natural experiment. SOX requires firms to enhance their internal controls to improve the reliability of financial reporting across corporate hierarchies. I find that after SOX, the capital allocation decision in conglomerates is more sensitive to performance as reported by the business segments. The effects are most pronounced when conglomerates are prone to information problems within the organization and least pronounced when they still suffer from internal control weaknesses after SOX. Moreover, conglomerates' productivity and market value relative to stand-alone firms increase after SOX. These results support the argument that inefficiencies in the capital allocation process are partly due to information frictions. My findings also shed light on some unintended effects of SOX on large and complex firms. The second essay is co-authored with Yaniv Grinstein and investigates how firms tie CEO compensation to performance. We take advantage of new compensation disclosure requirements issued by the Securities and Exchange Commission in 2006. Firms vary in their choice of performance measures and horizons, and in their reliance on pre-specified goals. Consistent with optimal contracting theories, we find that firms choose performance measures that are more informative of CEO actions, and rely less on pre-specified goals when it is more costly to contract on CEO actions. The third essay investigates the design of division managers (DMs) incentive contracts again taking advantage of the disclosure requirements. I find that firms do not use relative performance evaluation across divisions and that in general most of DM compensation incentives are associated with firm performance instead of division performance. Furthermore, division performance-based incentives tend to be smaller in complex firms, when within-organization conflicts are potentially more severe. I also find that when the probability of promotion to CEO is lower, DM ownership requirements are more stringent and DM compensation incentives are greater. These results support notions that influence costs as well as promotion-based incentives are important considerations in designing DMs contracts.
Corporate Finance; Corporate Governance
Michaely, Roni; Leary, Mark T; O'Hara, Maureen
Ph. D., Management
Doctor of Philosophy
dissertation or thesis