UBC Theses and Dissertations

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UBC Theses and Dissertations

Essays on empirical corporate finance Gao, Huasheng


In this thesis, I examine a few corporate finance topics, including mergers and acquisitions, CEO compensations, and corporate governance. The first paper studies the effect of managerial horizon on acquisition activities. Managers with a long horizon emphasize firms’ long-term value, whereas short-horizon executives are concerned about firms’ value in the short run. The paper’s main predication is that acquiring firms managed by short-horizon executives have higher abnormal returns at acquisition announcements, less likelihood of using equity to pay for the transactions, and worse post-merger stock performance in the long run. I construct two proxies for managerial horizon based on the CEO’s career concern and compensation scheme, and provide empirical evidence supporting the above prediction. The second paper examines optimal compensation contracts when executives can hedge their personal portfolios. In a simple principal-agent framework, I predict that the CEO’s pay-performance sensitivity decreases with the executive hedging cost. Empirically, I find evidence supporting the model’s prediction. Providing further support for the theory, I show that shareholders also impose high sensitivity of CEO wealth to stock volatility and increase financial leverage to resolve the executive hedging problem. Moreover, executives with lower hedging costs hold more exercisable in-the-money options, have weaker incentives to cut dividends, and pursue fewer corporate diversification initiatives. Overall, the ability to hedge firm risk undermines executive incentive and enables managers to bear more risk, thus affecting governance mechanisms and managerial actions. The third paper investigates the causes and consequences of sharp CEO pay cuts. We find that a large CEO pay cut is not uncommon and is typically triggered by poor stock performance. Good corporate governance structures strengthen the link between poor performance and CEO pay cut. On average, CEOs respond to their pay cut by curtailing capital expenditures, reducing R&D expenses, and allocating funds to reduce leverage. For most firms, performance improves and the CEO’s pay is restored. Together, our results show that the possibility of these compensation cuts provides ex ante incentives for CEOs to exert effort to avoid poor performance and ex post incentives to improve poor performance once pay is cut.

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