Three essays on corporate finance
Date of Issue2013
College of Business (Nanyang Business School)
The dissertation comprises three essays on corporate finance. Essay one examines whether the monitoring effectiveness of institutional investors varies with the number of stocks they hold as the largest institutional blockholder (institutional blockholding number). We find that a larger institutional blockholding number is associated with higher nonroutine CEO turnover-performance sensitivity, more frequent proxy voting against management, and higher abnormal returns around forced CEO turnover announcements and Schedule 13D filings. These results are particularly evident when institutional investors have multiple blockholdings in the same industry, when they have prior nonroutine CEO turnover experience in their other portfolio firms, or when their aggregate holding periods of block ownership in their portfolio firms are longer. Moreover, the change in Tobin’s q is higher for firms with a larger institutional blockholding number than for firms with a smaller institutional blockholding number. Our results suggest that information advantages resulting from past learning are important channels through which institutional investors with multiple blockholdings perform effective monitoring. Essay two examines whether a firm’s financing decision (SEO) affects the market value of other firms that share the same largest institutional blockholder as the issuer. We find that the stock prices of non-SEO firms in the portfolio react negatively when other portfolio firms make SEO announcements. We further find that after controlling for horizontal and vertical industrial information transfers, this spillover effect is more pronounced when issuers (non-issuers) have high information asymmetry or when their stocks are overvalued prior to an offering, or when issuers and non-issuers share similar characteristics (e.g., B/M, price momentum) or similar corporate policies (e.g., leverage policy). The spillover effect is also more evident when non-issuers have a near-term equity financing plan, when issuers time the market for their equity offerings, or when issuers’ largest institutional blockholders manage a small fund or have a small number of largest institutional blockholdings. These results suggest that stock offers by firms with a largest institutional blockholder induce investors’ adverse selection concerns for issuers as well as other firms in the same portfolio and that this adverse selection effect is particularly pronounced when the firms hold by the common largest institutional blockholder are relatively homogeneous or share similar styles. Essay three provides direct empirical evidences to the theoretical argument that competition for managerial talents explains the growth of executive pay. We examine this prediction from the perspective of executive job-hopping. Companies that lose executives to other firms raise pay dramatically for their remaining executives. The pay raise is mainly in the form of equity-based compensation and is more pronounced when the remaining executives have better employment mobility in the labor market. Overall, this paper provides direct evidence that competition for top executives drives up executive compensation.