Essays in Corporate Finance

Abstract

This dissertation consists of three essays. The first chapter examines the valuation effect of information asymmetry and the role of financial intermediaries as information gathering and processing experts. In a sample of cross-border mergers and acquisitions made by U.S. firms, we find that acquirers advised by investment banks from target home countries experience significantly higher announcement-period abnormal returns than other acquirers. This supports the hypothesis that local advisors have informational advantages over non-local advisors in assessing the true value of target assets and helping acquirers to avoid overpayment. We also document that acquirers advised by local banks are less likely to use stock as the payment method, which is consistent with the argument that acquirers advised by local banks bear less asymmetric information risk. Finally, we document that the time to complete an acquisition is shorter when a bidder is advised by a local bank. In the second chapter, we document that foreign independent directors serve on the boards of 14.6% of S&P 1500 firms over the 1998-2003 period. Using firm level fixed effects regressions, we find that companies with foreign independent directors are associated with lower firm performance measured by Tobin’s Q. Furthermore, Tobin’s Q is deceasing in the percentage of foreign independent directors. However, the negative relation between foreign independent directors and firm performance is substantially weakened when these firms have foreign operations. We also find that foreign independent directors are more likely to miss board meetings than domestic independent directors. Finally, firms with foreign independent directors, and especially when they sit on board audit committees, are more likely to misreport earnings. This body of evidence suggests that foreign independent directors are less effective monitors and contribute to weak corporate governance. In the third chapter, we present evidence on the benefits of changes in control from mergers and acquisitions. We find that the stronger the acquirer’s shareholder rights relative to the target’s, the higher the synergy created by an acquisition. This result supports the hypothesis that acquisitions of firms with poor corporate governance by firms with good corporate governance generate higher total gains.