Essays in Corporate Governance

Abstract

This dissertation uses forced CEO turnover events to provide new evidence on three important questions in finance and economics. Chapter one studies the causal relation between board structure and effectiveness of internal monitoring. Using the change in NYSE and Nasdaq listing rules following the passage of Sarbanes-Oxley Act (SOX) as a source of exogenous variation, I find that firms that after SOX moved to a majority independent board or to a fully independent nominating committee experience significantly larger increases in sensitivity of forced CEO turnover to firm performance than other firms. Consistent with this increase in turnover-performance sensitivity representing more effective monitoring, I find that forced CEO turnovers in affected firms are on average followed by improvements in both stock and operating performance and there is no evidence that the quicker firing significantly increases the chance of making type I errors in the post-SOX period. Chapter two develops a unified framework for measuring information quality of stock prices and accounting earnings and provides strong evidence that information quality of stock prices (accounting earnings) significantly affects the board’s updating on CEO ability based on stock (accounting) performance under a Bayesian learning framework. The effect is stronger for relatively new CEOs than for longer-tenured CEOs and for stock price information quality proxies than for accounting information quality proxies. The results suggest that information quality of firm performance measures puts significant constraints on corporate boards’ ability to quickly identify low ability CEOs for removal. Chapter three provides new evidence on the relation between competition and optimal managerial incentives through the effect of competition on sensitivity of firm profits to CEOs’ cost reduction effort or ability. Measuring competition by market size, entry costs and product substitutability, I find that market size (entry cost) is positively (negatively) related the probability of forced CEO turnover and sensitivity of forced CEO turnover to firm performance. Product substitutability is positively related to the probability of forced CEO turnover but negatively related to sensitivity of forced CEO turnover to firm performance. I further show that the results are primarily driven by firms in oligopoly industries.