Two essays on governance at the national and corporate level

TWO ESSAYS ON GOVERNANCE AT THE NATIONAL AND CORPORATE LEVEL By Laura S. Miller ESSAY 1 We examine the effect of governance environment on the composition of a country’s external capital structure, specifically foreign equity investment. In addition to the absolute quality of the host country’s governance environment, we consider the host country’s governance quality relative to that of the source (investor) country. Unlike previous studies, which utilize country totals, we examine foreign investment positions between pairs of individual countries. Our sample includes 3,891 bilateral investment positions among 49 source countries and 69 host countries for years 2009 through 2011. We find that relative governance, rather than absolute governance, plays a role in foreign investment. Specifically, a host country with lower governance quality relative to the source country (a greater difference) attracts less FDI as a share of foreign equity investment. Our results suggest that prior studies, which identified absolute governance as a significant factor, were evaluating an incomplete picture. When the focus is solely on the host country, the policy prescription appears rather straightforward—all countries should pursue higher governance quality to attract more foreign investment from all sources. We challenge this notion by showing that: a) different source countries evaluate host-country governance differently; and b) this evaluation is influenced by the difference between the governance environments of the two countries. ESSAY 2 Highly publicized governance failures in recent years have renewed research efforts to investigate the consequences of specific governance mechanisms. A better understanding of executive compensation contracts, specifically golden parachutes, is especially critical given their notorious status in the corporate governance debate. Instead of examining the explicit incentive role of golden parachutes (GPs) in influencing managerial behavior, we study their role as a tool for screening and recruiting reputable CEOs in a situation where recruitment would otherwise be difficult—severe financial distress that eventually leads to Chapter 11 bankruptcy. If GPs enable distressed firms to recruit reputable CEOs, there should be an observable link between the presence of GPs in employment contracts for newly hired CEOs and value-preserving firm outcomes. For our sample of firms, all of which filed for bankruptcy, this can be measured by the outcome of the bankruptcy proceedings, specifically the avoidance of liquidation. Thus, we hypothesize a negative relationship between the presence of GPs for newly hired CEOs and the probability of liquidation in bankruptcy. Consistent with this hypothesis, we find that firms led by newly hired CEOs with GPs are liquidated less often than other firms. This suggests that, regardless of their efficacy as corporate governance mechanisms, GPs can create value for shareholders. ACKNOWLEDGEMENTS I must first thank my husband, Bradley Miller, for his constant support and encouragement through all of my educational endeavors. We met as college students more than twelve years ago, and I have been a student ever since. Although this is a familiar role for me, I am ready to begin a new chapter in my life that offers more freedom to enjoy my other roles—the ones that really matter. Thanks is also due to Bradley and David Miller (a.k.a. Research Assistants 1 and 2), who assisted me in collecting and compiling data for this research project. The contributions of Dr. Maskara and Dr. Baek, which far exceeded duty and expectation, greatly enhanced the quality of this dissertation. I am very fortunate to have them on my team. My parents, Thomas Savory and Linda Savory, should share in this accomplishment, as they nurtured my love of learning from the very beginning and challenged me to pursue my goals. Finally, I thank Robert Rufus, my employer and mentor, for his investment in my graduate education and professional development—both tangible and intangible. Due in major part to his generosity, I have achieved more in the past ten years than I ever thought possible.