Three essays in empirical corporate finance
My dissertation consists of three essays that address two topics: (1) the compensation gaps among top corporate executives; (2) the effects of institutional arrangements on firm debt financing decisions. The first essay explores the economic determinants of compensation gaps between the CEO and non-CEO senior executives by comparing predictions of tournament theory and productivity theory. Examining situations where these two theories have conflicting predictions, we find little evidence that firms structure their executive compensation based on tournament theory. Our strongest evidence against tournament theory is found when a succession contest is most likely to occur, such as prior to CEO turnover and in firms predicted to be most likely to conduct a tournament to select their next CEO. In contrast, productivity differences among senior executives explain a large part of the compensation gaps for this sample. The second essay analyzes the relationship between compensation gaps and firm value, using insights from a principal-agent framework. Large compensation gaps on one hand reduce managerial shirking by imposing a promotion incentive, but on the other hand they induce counter-productive sabotage. Hence, their impact on firm value is jointly determined by the marginal benefit of reducing managerial moral hazard and the marginal costs of inducing sabotage. We find the relationship between the compensation gaps and firm value varies across firms with different levels of organizational complexity, technological intensity, riskiness and strength of corporate governance. Using the 2003 dividend tax cut as a quasi-natural experiment, we find further evidence that supports our initial conclusions. The third essay investigates the effects of institutional arrangements on firm debt placement choice and debt financing costs. Using a large sample of firms from 26 countries, we find that firms issue public debt more frequently in countries with: high GDP per capita, well developed banking sector, strong legal protections of creditors, strong legal enforcement, and more transparent financial information. Furthermore, bond yields and the yield spreads between publicly and privately issued bonds are lower in these countries. Lastly, a firm’s accessibility to international debt markets is also substantially affected by its domestic institutional arrangements.