Essays in Corporate Finance and Governance

Abstract

This dissertation consists of three essays in corporate finance and corporate governance. In the first chapter, I develop a structural model of executive compensation with non- binding shareholder approval votes (“Say-on-Pay", or SOP). In the model, the Board sets compensation policy and is biased towards offering a high wage (i.e., the CEO influences compensation). Shareholders can fail the vote and punish the Board. The threat of a failed vote affects compensation policy because the Board of Directors internalizes a cost to SOP failure. I show that providing this vote to shareholders has a disciplining effect on compensation and improves firm value. This is not obvious, given that SOP votes rarely fail.The second chapter presents work with Bruce Carlin, Alan Crane and John Graham. We show theoretically that using a hurdle rate above the cost of capital conveys a bargaining advantage when negotiating with outsiders. This arises through the use of a “sacred" firm-wide hurdle rate for capital budgeting, which allows project managers to commit when negotiating. We display empirical support for our model’s predictions. The third chapter presents work with Murillo Campello, John Graham and Yueran Ma. We study the direct and interactive effects of corporate flexibility (the ability for firms to adapt to changing business conditions) on firm plans at the onset of the COVID-19 crisis. We find that financial, workplace (the ability to easily shift to a remote workplace), and in- vestment (the ability to easily modify investment plans) flexibility played a key role. The key result of the paper is that different forms of flexibility (namely, workplace and investment during the COVID crisis) interact with each other and improve corporate flexibility.