Three essays on corporate finance
Date of Issue2014
College of Business (Nanyang Business School)
The dissertation comprises three essays on corporate finance. In essay one we examine whether corporate boards serve as a substitute or as a complement to external governance, using private firms as a setting for lack of external governance force. Supporting the substitution view that lack of external governance, such as hostile takeovers and stock market monitoring, makes private firms rely more on board monitoring, we find that compared to public firms, private firms have a smaller board, a higher proportion of outside directors, and a lower likelihood of CEO-chairman duality. We further find that private firms’ CEO turnover-performance sensitivity, going-public likelihood, and IPO value increase with the proportion of outside directors. Essay two examines the impact of board expertise on IPO underpricing using detailed biographical data on directors sitting on the boards of IPO firms over the period 2002 to 2008. We find that IPO firms whose boards have a higher proportion of directors with experience in investment banking, venture capital, and public firms (as directors or CEOs), or as lawyers, realize smaller underpricing. Directors’ investment banking and public firm expertise also help lower underwriting fees and enhance firm value as measured by ratio of market capitalization on the first trading date to pre-IPO sales. These results are more pronounced when the directors have served on the boards of the IPO firms longer. We also find that board expertise has a stronger mitigating effect on IPO underpricing when firms have more advisory needs such as when they are large, when they have high leverage, or when their IPOs are not backed by venture capitalists. Overall these results suggest that board expertise plays an important role in helping reduce IPO underpricing and increase shareholder value. Essay three focuses on corporate diversification, documenting a worsening effect over time. Diversified firms not only demonstrate a diversification discount; the discount also becomes larger over time after diversification. At a given point of time, mature diversified firms with larger diversification age are likely to perform worse than juvenile diversified firms. CEO incentives and information asymmetry partly explain the diversification time effect, but this time effect still holds after taking into consideration R&D expenditure, number of segments, firm age, CEO and board characteristics, other unobserved firm characteristics and self-selection bias. In addition, the time effect is not driven by poor corporate governance in mature diversified firms. However, mature diversified firms perform better and show a diversification premium during a financial crisis, which sheds some light on why firms choose to stay diversified.