Essays on Empirical Corporate Governance

This dissertation contributes to different areas in empirical corporate governance: composition of boards of directors (Chapter II), agency costs of free cash flow and the influence of large (institutional) blockholder (Chapter III), managerial preferences and the market for corporate control (Chapter IV), and insider trading (Chapter V). Chapter II analyzes the effects of bankers on supervisory boards of German non-financial corporations on firm policies and performance. The study suggests that bankers, while promoting their own business, actually cause a decline in the valuation of non-financial firms. Moreover, it provides evidence that the representation of bankers on supervisory boards has considerably reduced in recent years. One can interpret this adjustment of board composition as support for the hypothesis that firms slowly optimize their corporate governance after a formerly (presumably) efficient governance mechanism became inefficient. Chapter III presents a clinical study examining the transformation of Preussag, a diversified German conglomerate of “old economy” businesses, into TUI, a company focused entirely on tourism and logistics. The analysis brings out an important point of the free cash flow theory. The problem is not limited to managerial discretion over high operating cash flows, but extends also to managerial discretion over large amounts of liquid resources. Preussag’s divestitures of “old economy” businesses created additional liquidity without sufficient incentives for management to use this liquidity efficiently. Instead, the CEO of Preussag (later TUI) was able to pursue his pet project, to build the largest European tourism company, without interference of any of company’s watchdogs even after several billions in shareholder value were destroyed. In particular, the analysis exemplifies that large blockholders, who themselves suffer from agency problems, not necessarily help to overcome the problems arising from the separation of ownership and control. Chapter IV challenges the conventional view that value-destroying acquisitions are primarily undertaken by empire-building managers. The recent empirical literature on managerial preferences has found that the average manager is not interested in maximizing the amount of assets under their control but prefers to enjoy the “quiet life”. This chapter provides evidence that quiet-life managers execute acquisitions to secure the independence of their firms and thereby private benefits of control. These presumably defensive acquisitions of quiet-life managers are associated with significantly negative bidder announcement returns and therefore offer a new explanation for the well-established empirical result that many acquisitions lead to the destruction of shareholder value for bidder companies. Chapter V analyzes stealth trading by corporate insiders in U.S. equity markets. Stealth trading is the practice to break up trades into sequences of smaller trades in order to reduce the impact on market prices. We find that stealth trading is pervasive and was not reduced by the Sarbanes-Oxley-Act, which tightened insider trading regulation in 2002. Stealth trading is more prevalent in opaque, more volatile, and less liquid companies. Insiders use stealth trading in particular to camouflage large transactions, when they purchase stocks, and when they are on the short side of the market. They successfully reduce the price impact of their transactions by breaking up their trades.