Three essays in corporate management and firm policy
Creators: name: Qiao, Yankuo
Publisher: name: No Publisher Supplied
Year: 2021

description: The dissertation entitled “Three Essays in Corporate Management and Firm Policy” examines the relationship between corporate decision making and firm performance, with a particular focus on CEO transition and power distribution in the top management team. It includes three essays. These essays investigate, both theoretically and empirically, the nexus of top executives, firm value and various firm policies on corporate social responsibility, investment and voluntary disclosure. It strives to make a significant contribution to the literature on corporate finance, corporate governance, management structure and organizational behavior. The first essay, “CEO’s Investment Cycle in Social Capital and Its Impact on Firm Value,” demonstrates that there is a CEO-centric influence upon the level of firm investment in social capital, as measured by Corporate Social Responsibility (CSR). The CEO specific is widely recognized in the extant literature as a persistent and significant impact on various firm policies such as financing and investment. This paper hypothesizes that if managerial style is an important influence upon the firm’s investment in CSR, we would expect the greatest change in the level of CSR to occur when the new CEO takes over the company. The paper presents empirical evidence in support of this hypothesis. Moreover, it is found that the sudden change of CSR during the transitory period of CEO turnover is likely to be permanent in that the new CEO will on average not reverse the policy later in her tenure and the social responsibility policy becomes stable over time. One exception to this general pattern of CSR policy change is when the new CEO is an outsider. The latter finding is consistent with attunement theory which states that an outsider successor may be reluctant to aggressively change CSR due to the initial lack of viable relationship and trustful dialogue with different stakeholder groups of the firm. Thus, the capability and incentive of the outsider successor for changing CSR activities will be undermined or be self-refrained, and the outsider CEO tends to continue her predecessor’s policy in the early stage of tenure. Furthermore, based on the CEO-centric effect and the investment cycle in social capital, the paper investigates the value relevance of CSR during CEO transition period, when the investment in CSR changes dramatically. The empirical evidence suggests that CSR is value enhancing when “trust” becomes an important intangible asset during crisis period.The second essay, “Impact of Internal Governance on a CEO’s Investment Cycle,” examines the impact of internal governance on the cyclical pattern of corporate investment policy. The extant literature defines internal governance as the mechanism by which senior executives help discipline the CEO to maximize shareholder value. Weisbach (1995) finds that a year or two before the CEO retires, the firm experiences a decrease in total investment, suggesting the CEO cuts their investment to conserve current resources. Pan, Wang and Weisbach (2016) find evidence of a CEO’s investment cycle, in which investment increases over a CEO’s tenure, whereas disinvestment decreases. These papers suggest that older CEOs incur agency costs as they try to extract rents as their investment horizon declines. The empirical evidence of this paper confirms their results, and additionally shows that good internal governance helps reduce older CEOs underinvesting before their exit. No significant relationship in either economic or statistical sense is found between internal governance and investment for younger CEOs. This suggests that older CEOs who face good internal governance underinvest less. It is also found that new incoming CEOs divest profitably these projects acquired by their predecessors under good internal governance. These results are robust to: normal CEO retirements (exclude performance-related turnover), sudden CEO deaths, and controlling for measures of board size, proportion of outsiders on the board, CEO pay-performance sensitivity, CEO pay slice, CEO power, firm complexity and if the CEO was an outsider or not.The third essay, “To Delegate or Not to Delegate? On the Quality of Voluntary Corporate Financial Disclosure and Its Market Impacts,” investigates the impact of delegation structure of the top management team upon the quality of corporate voluntary disclosure on financial outcomes. The paper develops two competing hypotheses pertaining to the functional relationship between the degree of delegation and the management forecast accuracy. On the one hand, as indicated by the literature on internal governance, the efficacy of the top management team is optimized when neither the CEO nor the subordinate managers are dominant. On the other hand, an extensive literature has documented the importance and centrality of the CEO as well as the relevance of the subordinate managers to the voluntary disclosure activities. The empirical findings are in support of an inverted hump-shaped relationship between the degree of delegation and the quality of voluntary information provision, suggesting that an internal optimality of responsibility sharing between the CEO and her immediate subordinates does not exist for information production, transmission and dissemination. Partial delegation and mixed executive duties lead to deteriorating quality of voluntary disclosure. In particular, the paper analyzes several aspects of managerial earnings forecasts (MFs), the most influential type of voluntary financial disclosure. The documented curvilinear forms are generally persistent across multiple quality metrics for MFs. Consistent with the literature on executive horizon and risk propensity, the curvilinear relation is more significant when the top management team is led by an older CEO. The paper utilizes an identification strategy of structural equations, which controls for selection bias and reverse causality. To theoretically underpin the arguments and empirical findings, a model of internal information production is developed in the framework of Bayesian Nash Equilibrium. The paper further documents that when the delegation structure is clear, namely either the CEO or subordinates are in charge, the liquidity of the company’s stock improves. The empirical evidence also suggests that the variation of liquidity driven by delegation structures is not actively incorporated in stock prices.