ESSAYS ON EXECUTIVE COMPENSATION, CAPITAL STRUCTURE AND CORPORATE GOVERNANCE

Abstract

This dissertation consists of three essays on the relation between executive compensation, capital structure and corporate governance. In the first essay, I examine the relation between CEO option compensation and firm capital structure. The empirical challenge in studying this relation is that these are both choices of the firm that are made simultaneously. Therefore, it is difficult to conclude from the existing literature the causation of this relation. Using the Internal Revenue Code (IRC) 162(m) tax law as an exogenous shock to the compensation structure in a natural experiment setting, I can identify now firm leverage changes as a result of the CEO option compensation changes. The evidence provides strong support for the debt agency theory. The results indicate that firms decrease leverage when CEOs are paid with more option grants and as those options become a higher percentage of the firm's future cash flows. The findings are robust to addition of corporate governance and convertible debt dimensions to estimation. The second essay studies the effect of internal board monitoring on the firm's debt maturity structure. I use the Sarbanes - Oxley Act of 2002 (SOX) and the Securities and Exchange Commission (SEC) regulations as exogenous shocks to board structure in a natural experiment setting. Supporting the agency theory, the findings indicate that firms have debt with longer maturity as board independence increases and internal board monitoring becomes powerful. The results are even stronger for complex and larger firms such as conglomerates. I find the relation between internal monitoring and debt maturity becomes less clear during times of financial instability. The third essay investigates the impact of externally mandated versus organically determined corporate governance modifications on firm performance. SOX and SEC regulations are employed as a natural experiment in order to examine the imposed rules and elucidate the identification issues. The findings suggest that companies which voluntarily determine the necessary corporate governance modifications based on firm specific characteristics and needs perform better than the case where they are all forced to alter their board structure.