Three essays on corporate finance
Date of Issue2012
College of Business (Nanyang Business School)
This dissertation contains three essays on corporate finance. The first essay examines the role of government directors (outside directors with past work experience in government agencies) in corporate governance and their effect on firm performance. We find that unlike nongovernment outside directors, government directors on the board are not associated with an increase in CEO turnover-performance sensitivity. Government directors are also more likely to miss board meetings than nongovernment directors, although not when firms have a major trading relationship with the government. Further, compared to firms without government directors, firms with government directors experience weaker annual operating performance and more negative merger announcement returns, but their mergers are less likely to be challenged by antitrust authorities. We also find that announcements of government director appointments are greeted more negatively by investors than those of nongovernment director appointments. However, our results for operating performance and announcement returns are not observed when firms with government directors operate in regulated industries. Our results highlight the ineffectiveness of government directors as monitors and advisors as well as the circumstances under which they add value. Essay two investigates the governance role of customer blockholders -- blockholders who are also firms’ corporate customers. We find significant differences between customer deals, where acquirers are targets’ customers, and noncustomer deals, where acquirers hold only equity stakes in targets after the deals. In particular, customer deals elicit larger announcement effects, lead to more involuntary top executive turnovers among poorly performing targets, and result in greater improvements in target firms’ operating performance, than do noncustomer deals. Moreover, we find that these differences are especially pronounced when targets’ managerial agency problems are likely to be highly detrimental to their product market relationships. Our evidence supports the view that customer blockholders’ nonfinancial claims arising from the product market relationships enhance their incentives to strengthen target firms’ corporate governance and improve target firms’ operating performance. Essay three examines how friendly directors affect firm innovation. We find that firms with friendly directors have more research and development expenditures. These investments translate into greater innovation using patents and patent citations to measure the quantity and quality of innovation.