Essays in Empirical Corporate Finance

The thesis comprises three independent though topically related papers that empirically investigate the relationship between corporate governance and finance. The first paper ‘Corporate Governance, Input Market Regulation, and Equity Prices’ links how anti-competitive regulation in the input market impacts the effectiveness of corporate governance in terms of firm and market performance. For stock price related data, I find that governance and regulation are complements: abnormal returns of hedge portfolios based on corporate governance quality are only attainable in industries which are highly competitive. For companies in relatively competition-protected industries governance has no impact on market data. Turning to business fundamentals, the relationship reverses and governance and competition become substitutes, i.e. companies’ operating performance benefits from strong governance if the company operates in a relative anti-competitive industry. The second paper ‘Corporate Governance and Idiosyncratic Skewness: Evidence from External and Internal Provisions’ (co-authored with Thorsten Lehnert) analyzes the relationship between corporate governance and firm-specific skewness of stock returns for U.S. firms. Since firm-level skewness determinants are differences in investor opinion, information and information asymmetries, and companies with good corporate governance are more informative and transparent than their counterparts with less shareholder protection, we argue that differences in the quality of corporate governance matter to idiosyncratic skewness. We test this hypothesis by analyzing the impact of external as well as internal governance provisions, and are thus able to provide an overall understanding of the relationship between governance and firm-specific return asymmetries. The results show that better governance leads to a reduction in idiosyncratic skewness in relatively non-competitive industries. In industries that face higher levels of competition, governance has no impact on firm-specific return skewness. Especially the results of the internal governance analysis are robust and both statistically and economically significant. The third paper ‘Compensation Structure under Debt Insurance’ investigates the relevance of compensation structure as a means towards managerial incentive setting. Inside debt is designed to align managers with debt holders, and to mitigate risk-taking versus risk-avoiding conflicts of interest between shareholders and bondholders. Thus it constitutes an efficient component in the equity- and debt-like compensation structure of executives. However, under debt insurance the alignment structure should shift – towards the interests of equity holders. And it does. Exploiting first-time initiations of credit default swaps (CDS) on a reference entity, I show that companies whose debt can be insured through CDS significantly reduce their CEO’s relative debt-equity and incentive ratios, therefore shifting the incentive structure towards equity holders. The results are economically large and robust.