Three essays on corporate governance

Abstract

My thesis discusses the corporate governance by hedge fund activists. We also study the impact of corporate governance policy on debtholders and industry peer firms. In Chapter 1, we examine whether hedge fund managers’ experience affects their activism. We find that hedge fund managers are more likely to choose a target that operates in an industry in which they have previous executive and/or outside director experience. Compared to target firms in which hedge fund managers do not have target industry experience, those in which hedge fund managers have target industry experience realize higher abnormal announcement returns and these managers are more likely to serve as a director on the target’s board. We further find a significant improvement in target post-acquisition operating performance when hedge fund managers have executive experience in the target industry. These findings suggest that a hedge fund manager’s industry expertise is an important source of value gains in hedge fund activism. In Chapter 2, we investigate whether the effects of antitakeover provisions (ATPs) on debtholder wealth vary depending on corporate ownership structure. Using a regression discontinuity design approach, we find that the cost of bank loans significantly decreases (increases) for family (nonfamily) firms after the passage of close-call shareholder proposals to remove ATPs. The loan-spread-reducing effects of the removal of ATPs for family firms are evident only when they have better governance and are therefore more likely to implement the proposals, when they maintain a debtholder-friendly policy, or when they have lower default risk. Our findings suggest that ownership structure along with a firm’s governance quality and default risk is an important factor that determines the effects of ATPs on the cost of debt. In Chapter 3, we investigate the spillover effect of passing shareholder-sponsored proposals related to removing antitakeover provisions (ATP proposal) on industry peers using a regression discontinuity design (RDD) that relies on locally exogenous variation generated by shareholder proposal votes,. We find that rival firms in the same industry experience negative stock price reactions to the announcement of the passage of an ATP proposal by a voting firm. This negative spillover effect is more pronounced for rival firms operating in industries with low concentration (Herfindahl-Hirschman index), where acquisition activities/approvals are not extensively regulated by antitrust policies and thus the takeover incidence is expected to be high. The negative abnormal returns are also significantly larger for rival firms that are more likely to receive takeover bids ex ante and those with weaker antitakeover defenses than the voting firm before shareholder meeting. These results suggest that although removal of ATPs by a voting firm increases its takeover vulnerability, it reduces the likelihood of peer firms’ future takeover, particularly those with weak takeover protections.