Three essays on corporate finance
Date of Issue2012
College of Business (Nanyang Business School)
Essay one examines the disciplinary role of corporate pension deficits (the difference in value between pension liabilities and pension assets) in the market for corporate control. We find that during the 1981 to 2008 period, firms with larger pension deficits are less likely to engage in mergers and acquisitions (M&As), particularly diversifying M&As, than those with smaller or no pension deficits. We also find that the announcement returns of both the acquirer and the value-weighted portfolio of the acquirer and the target increase with acquirers’ pension deficits. Further, acquirers’ pension deficits are negatively related to the premiums paid to targets, but positively related to the percentage of cash used in payment to targets. These results are evident only for a subsample of financially unconstrained acquirers, suggesting that they are not driven by lack of acquirers’ internal funds. The results are also more pronounced for subsamples of acquirers whose pension plans are dominated by actively working employees (i.e., fewer retirees), those whose pension plans are collectively bargained, and those in more unionized industries. These findings indicate that corporate pension deficits provide employees with strong incentives to monitor managerial performance and influence managers to make value-enhancing investment decisions. Essays two examines the executive compensation schemes of firms whose employees invest in company stocks in the defined contribution (DC) pension plan. I find that during the period 1992 to 2007, firms with higher employee ownership are more likely to reduce the level and fraction of CEO pay in the form of stock options. CEO interest alignment (Delta) and risk-taking incentives (Vega) are significantly suppressed in these firms. These results are more evident for subsamples of firms in more unionized industries, firms whose employees are more difficult to retain, firms with weaker free-riding problems among employees, firms that adopt broad-based employee stock ownership plans, and firms with higher capital intensity. These findings suggest that employee ownership enhances the mutual monitoring of and coordination among rank-and-file employees, thereby reducing the need for high-powered CEO stock option. They also indicate that when employees bear large amounts of undiversified risk by holding employer stocks in the DC plan, firms tend to lower managerial risk-taking incentives so as to avoid costly labor costs and litigations. In essay three, we examine whether employee stock options motivate employees to contribute to corporate innovation. Our analysis shows that the innovation output in a firm measured by the numbers of total patents applied, total citations of the patents, and citations per patent significantly increases with the non-executive stock options per employee after controlling for the research and development (R&D) expenditures and executive stock options. The positive effects of employee stock options on corporate innovation are more evident in subsamples of firms in more unionized industries, firms where employees are more difficult to retain, firms with a weaker free-riding problem among employees, firms whose stock options have a longer expiration period, and firms organize a broad-based employee stock option plan. Finally, we show that the enhancement of corporate innovation productivity is mainly from an increase in employees’ risk-taking incentives (vega) rather than employees’ interest-alignment incentives (delta). Taken together, these findings suggest that employee stock options enhance employees’ risk-taking incentives and failure-bearing capacities in a firm’s high risk-profile innovative activities, leading to a significant improvement in the productivity of corporate innovation.