Essays in Corporate Governance

Corporate governance examines the mechanisms through which managers and directors are incentivized to act in the best interests of shareholders. The three essays of this dissertation focus on internal and external control mechanisms in the CEO and director labor markets and their effectiveness in aligning the interests of mangers, directors and shareholders. The first essay examines the extent to which CEO turnover rates vary within industries and its consequences for board monitoring and managerial incentives. I find that the rate of dismissal varies significantly within industries, exhibiting periods of high firing rates and extended stretches in which no turnover occurs. This variation impacts the board’s monitoring of the CEO as turnover-performance sensitivity increases with industry dismissal rates. Consequently, changes in the evaluation of CEO performance influence the behavior of executives. CEOs are less likely to engage in acquisitions during periods of high industry turnover, however, conditional on making a bid, acquisition announcement returns are higher suggesting industry turnover risk as a managerial incentive.

The second essay (with Tom Bates and David Becher) examines the threat of replacement as an incentive to align the interests of members of corporate boards with those of shareholders. Our results suggest an economically significant relation between director turnover and prior firm performance. Director turnover-performance sensitivity is higher in the post-SOX period and is moderated by certain internal and external governance features. In addition, turnover has a negative impact on the likelihood that a director gains a future directorship following their exit, suggesting the director labor market offers ex-post settling up for poorly performing directors.

The final essay (with David Becher and Ralph Walkling) examines the stability and composition of acquiring firm boards around mergers. Contrary to perceived wisdom, we find that the composition of the post-merger board changes substantially and these variations are significantly different from non-merger years and non-merging firms. Our analysis provides insight into those characteristics valued in the director labor market in the context of a relatively well-defined director pool. Changes to the board around mergers reflect an increased need for CEO, merger, and industry expertise consistent with firms upgrading skills associated with executive and deal experience. Conversely, director selection in non-merger years is driven by general skills and diversity. Overall, acquirer boards change substantially around mergers driven primarily by firm need and bargaining to facilitate deal negotiations.

Many thanks to Jared’s dissertation committee:

Committee Chair: Ralph Walkling, Professor of Finance and Christopher and Mary Stratakis Professor in Corporate Governance and Accountability Committee Member: David Becher, Associate Professor of Finance Committee Member: Naveen Daniel, Associate Professor of Finance Committee Member: Michelle Lowry, TD Bank Professor of Finance Committee Member: Jonathan Karpoff, Washington Mutual Endowed Chair in Innovation and Professor of Finance, University of Washington