Date of Completion

11-17-2015

Embargo Period

10-20-2015

Keywords

CEO Compensation, Information Asymmetry, M&A

Major Advisor

Chinmoy Ghosh

Associate Advisor

Joseph Golec

Associate Advisor

Paul Borochin

Field of Study

Business Administration

Degree

Doctor of Philosophy

Open Access

Open Access

Abstract

This dissertation consists of three essays on various aspects of corporate finance. In the first essay, we examine the mean effect and volatility effect of CEO pay gap from creditors' perspective. Prior literature suggests that CEO pay gap relates positively to both the mean and the volatility of the stock return distribution. The mean effect and volatility effect of CEO pay gap yield opposite predictions regarding the creditors' reactions to CEO pay gap. In this study, we systematically study the impacts of CEO pay gap on debt contracting. We first confirm the mean effect and volatility effect of CEO pay gap. However, we find that mean effect better explains the relation between CEO pay gap and a firm's tail risk, crisis-period performance, and default risk in that CEO pay gap is associated with lower tail risk and default risk and better performance during the crisis period. We then document comprehensive evidence consistent with the mean effect of CEO pay gap in debt contracting. In particular, we find that there exist negative relations between CEO pay gap and cost of debt and the number of restrictive debt covenants, but a positive relation between CEO pay gap and debt maturity. Overall, our results provide overwhelming evidence in support of the mean effect of CEO pay gap from the creditors' perspective.

In the second essay, using an information asymmetry factor obtained from factor analysis using 10 well-documented information asymmetry proxy variables, we first confirm the existence of an information asymmetry discount in firm value. We then empirically examine whether M&A announcements, which are usually accompanied by the release of large amounts of information about the targets due to careful scrutiny on the targets by the market, can serve as a mechanism to capture the target information asymmetry discount. We find that there exist significantly positive M&A announcement-period wealth gains, as measured by target-acquirer portfolio abnormal returns, that are related to target information asymmetry. The wealth gains related to target information asymmetry are shared by both acquirers and targets. We preclude acquirer information asymmetry, corporate governance, and post-merger operating performance improvement as the alternative explanations of the wealth gains related to target information asymmetry. Furthermore, we find that firms with high information asymmetry are more likely to become targets. In terms of relative wealth gains between the acquirer and target, we find the party with high information asymmetry benefits less. At last, we document that target information asymmetry significantly influences certain deal characteristics such as method of payment, the likelihood of diversifying deals, the relative deal size, and days to complete the deals.

In the third essay, we attempt to answer the following two questions: does the management-shareholder power balance message delivered the 24 IRRC corporate governance provisions matter to the investors or do those provisions only matter for their antitakeover implications? Does the antitakeover effect of the BCF index and the staggered board provision indeed the cause of their strongly negative association with firm value documented by previous researchers? We design the study by re-examining the relations between various corporate governance indices (GIM, BCF, staggered board and cumulative voting) and acquirer announcement-period abnormal stock returns in the banking industry where the hostile takeover bids are rare. We find that in the absence of market for corporate control, the GIM index and the cumulative voting provision are still strongly related to acquirer abnormal returns while the BCF index and the staggered board provision lose their significance. Our findings confirm the linkage between market for corporate control, the BCF index and the staggered board provision and firm value. In addition, by showing that banks which distribute more rights to their shareholders are better acquirers, we provide evidence that the management-shareholder power balance effect of the corporate governance provisions should not be ignored.

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