Essays on the economics of organizations

Understanding how organizations choose their rules of behavior, how they interact in the market, and the possible ways to improve their internal structure or their market performance have been the aim of a vast literature. The analyzed questions include identifying the ways to overcome the agency costs, dealing with information asymmetry or other obstacles leading to inefficiency, creating corporate valuation, and so on. However, in spite of the large number of papers on the subject, there is still a lack of understanding the firms' behavior. The recent corporate governance scandals are one of the evidence suggesting more studies in this area. In this thesis, my aim is to contribute to the understanding of productive organizations. I address three problems in which I present the research interests: empirical analysis is used in some cases, and I provide theoretical models to analyze the empirical phenomenon, as well. The second chapter of the thesis studies one of the major conflicts within a firm, i.e., the conflict between shareholders (owners) and managers (controllers). Different from previous corporate governance literature, Chapter 2 analyzes how to mitigate the shareholder-manager conflicts by taking into account the effect of manager-employee relationship. For modern firm, employees are treasury assets, and they can be influential in firm's strategy and be important to corporate control. When incumbent managers faces a replacement threat, they have an incentive to build up a good relationship with the employees at firm, in order to get support from the latter. Enjoying the good relationship, employees may help to keep the incumbent managers, by protesting for them to the shareholders, even though an alternative manager is more capable. Since good manager-employee relationship helps to increase employees' working effort, shareholders also benefit from it and are willing to share the ownership with employees. Therefore, when human capital is very important, it is more common to have employee ownership at firm, such as the auditing industry and advertising industry. Another main result from the chapter is that managerial entrenchment is not necessarily bad to corporate control. Also concerning corporate governance of firms, but different from the internal relationship discussed in Chapter 2, the third chapter of the thesis focus on firms' relationship with external policy makers. Chapter 3 investigates the impact of firms' corporate governance level on their choices in non-market competition strategy: firms' political strategy of doing informational lobbying or exerting political pressure on policy makers. Since the owner and the controller of a firm usually have different interests and having good political relationship is an important firm strategy, it is interesting to study how the shareholder-manager conflicts would affect their choice of political strategy. Shareholders, as the owner of a firm, care about firms' long-term success and development. Therefore, they prefer to invest in informational lobbying to influence policy makers' behavior, as it is based on hard and verifiable information that lasts in long run. On the contrary, managers are more interested in their personal benefits. Exerting political pressure, which has short-term effect, becomes a favorite political strategy for managers, to achieve quick financial benefits. Hence, a better corporate governance level leads to more investment in informational lobbying rather than political pressure and higher probability of making right policy decisions. The last chapter is written together with Yun Lou and David Perez Castrillo. Diverting from large and mature corporations, we pay our attention to small and newly created firms, i.e., the spin-offs. Compared with grownup firms, spin-offs have higher uncertainty of future performance and more asymmetric information between insiders and outsiders. As a result, they have restricted financing options. One of the most commonly used financing instrument for spin-offs is the venture capital funds. In Chapter 4, we consider two types of venture capital funds: Corporate Venture Capital funds (CVCs) and Independent Venture Capital funds (IVCs). We try to find out their influence on spin-offs' investment decision and, most importantly, on the choice of optimal exit strategy, i.e., IPO or Acquisition. CVCs are different from IVCs in that except financial returns, the former is interested in obtaining strategic benefits (like being informed of the technology innovation) from investing in spin-offs. Therefore, CVCs are less compelled than IVCs to recover the investment earlier. Because of this, spin-offs backed by CVCs invest more than those backed by IVCs, and they have a higher rate of successful exits. Contrary to the previous literature, we find that, among those successful exits, CVC financed ventures exit more often with IPO rather than being acquired, if the two types of spin-offs have similar exiting period.