Three essays on corporate finance
Date of Issue2014
College of Business (Nanyang Business School)
In essay one, we compare employee-friendly policies in family and nonfamily firms and examine whether a firm’s ability to treat its employees explains the difference in market values between them. We find that compared with nonfamily firms, family firms treat their nonexecutive employees better (as measured by high employee-friendly policy ratings), which leads to higher firm value and greater employee productivity. We also find that family firms delegate greater decision-making power to nonfamily executive employees, and exert more effort to recruit and retain a prestigious top executive team, which contributes to firm value. These findings suggest that employee-friendly policies are an important channel through which family firms create value and gain competitive advantages relative to nonfamily firms. In essay two, we investigate how the role of antitakeover provisions (ATPs) in alleviating the conflict of interests between shareholders and creditors differs between family and nonfamily firms. We find that while nonfamily firms with more ATPs (measured by the G-index) enjoy a lower cost of bank loans, the corresponding family firms do not. The adverse effect of ATPs on the cost of debt for family firms is particularly severe when they adopt control-enhancing mechanisms to maintain control. We also find that the adverse effect is more pronounced when bank loans are unsecured or have no covenants, when family firms are insulated from disciplinary forces (e.g., low product market competition or low leverage), or when family firms have more powerful CEOs (e.g., CEOs are the chairmen of the board, are old, or receive excess compensation). The results suggest that agency conflicts that vary depending on a firm’s ownership and governance mechanisms are important considerations in examining the effects of ATPs on the cost of debt and that banks effectively factor in such conflicts when determining loan rates. In essay three, we investigate how governance reform affects board functioning and firm value through the labor market channel. We find that the presence of unseasoned independent directors (UIDs) after the 2002 enactment of the Sarbanes-Oxley Act (SOX) is more common in firms not compliant with the board and committee independence provisions. Further, the likelihood of UIDs being appointed to monitoring committees is significantly higher in the post-SOX period. Although investors on average react negatively to firm decisions to appoint UIDs in the pre-SOX period, this negative reaction is completely negated in the post-SOX era. We also find that the increased presence of UIDs in post-SOX boardrooms does not lead to low quality board monitoring and advising or poor firm performance. In some corporate events such as CEO turnover and financial reporting decisions, we find that boards with UIDs perform better than boards without UIDs. Overall, our findings highlight positive impact of governance reform on board functioning and firm value through its influence on directorial labor markets.