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Essays in Empirical Corporate Finance
Date of Award
Olin Business School
Doctor of Philosophy (PhD)
This dissertation evaluates the role of political incentives, conglomeration and bankruptcy on firm performance and executive compensation. The first analyzes the role of political influence
on the investment behavior of firms with majority government stake. The second chapter explores the impact of various externalities that may arise in multi-divisional firm on managerial compensation. In the third chapter, we investigate the impact of relative bargaining power of firms over creditors during bankruptcy on ex-post firm performance, once the firm emerges out of bankruptcy.
Political interference has long been considered a major source of
inefficiency in state-owned enterprises. However, empirical evidence
regarding the impact of political influence on non-financial firms has been limited. We evaluate the influence of political factors on corporate investment decisions using a unique database of new investment projects announced in India, matched with electoral data at the district level for the period of 1995-2009. We find that state-owned enterprises (SOEs) announce a greater number of projects during election years, especially in politically competitive districts. The number of investments announced by central (state) government firms in election years is on average 36% (58%) greater
in districts in which the ruling party won or lost the previous election by a narrow margin (< 5%) compared to other districts. We do not
observe similar investment patterns for private firms. We also find that investment announcements are greater in districts associated with high-ranking politicians and those in the home state of the ministers with jurisdiction over the SOEs. Such political manipulation is however costly since we find the politically motivated investments to be associated with negative announcement returns. Overall our results have policy implications for the effects of government ownership on real economic outcomes.
The second chapter evaluates the role of DM incentive contacts in resolving agency conflicts that may arise in a multi-division firm. For the first time in literature, we use hand collected data to study the pay structure of division managers (DM). Using data on 4,080 DM-year pay contracts, we relate DM pay to the performance of both her division and other divisions in the firm. Consistent with the idea that the actions of a DM can impose externalities on the rest of the firm, we find that DM pay loads positively on both her division's and the other divisions' performance. Consistent with differences in their spheres of influence we find that the pay for other divisions' performance is significantly greater for the firm's CEO. While CEO pay is equally sensitive to the performance of all divisions in the firm, DM pay is more sensitive to her division's performance as compared to the performance of other divisions. Further, pay for division performance is lower in industries with less informative accounting earnings. This highlights an important cost of conglomeration. The sensitivity of DM pay to other divisions' performance is especially greater for related divisions and for divisions with fewer growth opportunities as measured by industry Tobin's q and past division sales growth. Focusing on economic conditions, we find that the sensitivity of DM pay to both the performance of her division and other divisions is lower during economic downturns and periods of economic distress. Overall, our evidence suggests that DM compensation is structured to solve agency problems in multi-division firms and reflects the constraints in the contracting environment.
In the third chapter of my thesis evaluates the impact of bargaining between management and creditors on bankruptcy outcome and ex-post efficiency of bankruptcy resolution. We find that firms in which creditors (management) exerts greater (lower) influence in the negotiation process are more likely to be liquidated. Increase in power of creditors during the bankruptcy negotiations is associated with lower likelihood of re-filing and superior post-bankruptcy profitability among firms that emerge. However such ex-post efficiency gains come at a cost as increase in power of creditors also leads to a lengthier bankruptcy. The unique aspect of our analysis is our ability to correct for the selection bias engendered by our focus on firms that emerge out of bankruptcy using the Bankruptcy Abuse Prevention and Consumer Protection Act (BACPA) passed in 2005 as an exogenous shock to the likelihood of liquidation. Collectively, our results lend credence to the idea of allocating greater power to creditors in bankruptcy proceedings.
Chair and Committee
Anjan Thakor, Tat Chan, Phillip Dybvig, Ohad Kadan, John Nachbar
Alok, Shashwat, "Essays in Empirical Corporate Finance" (2013). Arts & Sciences Electronic Theses and Dissertations. 253.