Three essays on corporate governance

Abstract

This thesis consists of three essays on different internal and external corporate governance mechanisms. The first essay examines internal corporate governance by independent directors. It studies exogenous events that temporarily distract independent directors, including illnesses and material events at their external professional positions. The study finds that preoccupied independent directors become less active and committed (lower board attendance, less trading in firm stocks and more frequent board departures). Firms with preoccupied directors have lower firm value, operating performance, M&A profitability, accounting quality and CEO pay-performance sensitivity, especially when directors have important monitoring roles or firms require greater director attention. The second essay focuses on external auditors. The study exploits exogenous attention shocks to assess the value of auditors. When an audit office is temporarily distracted, some of its clients experience a sharp decline in auditor attention (i.e., the treatment firms) while some do not (i.e., the control firms). It finds that the treatment clients to experience significantly more negative market reaction than control clients, especially if the distraction is strong or the clients are relatively unimportant to the audit office. In the longer term, auditor distraction causes higher levels of earnings management, crash risk, stock return volatility and directors’ workload. This last finding links back to board of directors, which is the internal corporate governance mechanism examined in the first essay. The third essay is related to the market for corporate control. This study examines the role of firm-level experience in the context of divestitures. It finds that divesting firms that have recent divestiture experience are more likely to sell peripheral or underperforming units, and to divest during industry merger waves. They earn higher returns on divestiture announcement, have stronger operating performance post-divestiture, tend to reinvest sale proceeds in expansion programs using acquisitions (especially value-creative ones), and are less likely to be targeted in acquisitions in the future. Importantly, divestiture experience at the firm level dominates other measures of experience, including divestiture experience of CEOs or boards, and experience in acquisitions.