Three essays in corporate finance and corporate governance

• Main Author: Wang, Jing
• Other Authors: Yohanes Eko Riyanto
• Format: Theses and Dissertations
• Language: English
• Published: 2013
• Subjects: DRNTU::Business::Finance::Corporate governance; DRNTU::Business::Finance::Corporate finance; DRNTU::Social sciences::Economic theory::Money and banking
• Institution: Nanyang Technological University

This dissertation consists of three self-contained essays on corporate finance and corporate governance. The first essay models the firm’s decision on whether to go public or stay private. The explanation for the going public decision is based on the catering-to-market motive. The private ownership allows greater flexibility in operation decisions. In contrast, the business strategy in the public firm is subject to investor sentiment. The model suggests that managers' willingness to take efficient strategic actions depends on the relative importance of corporate strategic decisions and external shocks on future profitability. If the strategic decision is less important than the random shock, then a large proportion of the firm performance is determined by the exogenous shock, and thus managers will never choose initial public offering (IPO) because of risk of experiencing severe underpricing. If the strategic decision plays a bigger role than the external shock on the future profit, managers can launch IPO to raise capital but IPO provides managers with the incentives to select the strategy to please investors instead of selecting the best strategy perceived by managers. Aware of this temptation, managers choose to stay private. If managers determine to swim against the tide, they have to issue more equity to raise the same amount of capital because investors underprice the shares. The baseline model assumes that investors are boundedly rational. This essay also develops a parallel model assuming that investors are fully rational. However, full rationality cannot entirely eliminate inefficiency. The second essay examines the interactions among three corporate governance mechanisms of the U.S. public firms, namely, the board structure, product market competition, and incentive compensation. The board structure and product market competition serve as monitoring devices that provide a disciplinary `stick' to managers. The former is an internal monitoring device, while the latter is an external monitoring device. In contrast, incentive compensation provides a `carrot' to align the incentive of managers with that of owners. This essay evaluates the change in the board structure following the enactment of the Sarbanes-Oxley (SOX) act in 2002 on the strength of incentive compensation provision. It employs the combination of the difference-in-difference-in-difference approach and the propensity score matching in an attempt to mitigate the endogeneity problem. The results show that pay-to-performance sensitivity on average decreases because of SOX enactment, and this decrease is bigger in more competitive industries. The last essay examines how the corporate cash policy is affected by the industry financial dependence. The main finding is that firms effectively use tangible assets to signal pledgeability to investors and debt holders as to reduce excessive cash holdings, and this negative relationship between cash holdings and asset tangibility is more pronounced in financially dependent industries. It further finds evidence consistent with the hypothesis that asset tangibility is indeed a choice variable of the firm rather than an exogenously determined industry attribute.