Essays on Corporate Finance

Abstract

My thesis consists of two chapters in the area of empirical corporate finance. In the first chapter, I examine the effect of non-CEO compensation horizon on firm short-termism and investment. I find that a lower compensation horizon is associated with lower spending on R&D, CAPX, and acquisitions. Using equity vesting events as plausibly exogenous shocks, I show that C-suite executives’ short-term interests predict declines in investments. These short-term-motivated investment distortions translate to high stock market gains. Months where both the CEO and at least one other C-suite executive have a vesting event are associated with a 0.86% monthly abnormal return. My findings suggest that non-CEO executives’ horizon is incrementally important for determining investment distortions beyond CEO incentives.The second chapter of my thesis is coauthored with Jonathan Karpoff, Jennifer Koski, and Gerald Martin. We use a comprehensive database of regulatory enforcement actions for financial misrepresentation to estimate prediction models using logistic, machine learning, and bivariate probit classifiers. Our parsimonious logistic model and three versions of a Support Vector Machine learning model perform well both in and out of sample, each with an average area under the ROC curve (AUC) of 0.78 in out of sample tests. These top-performing models yield similar inferences. Our base logistic model estimates that 22.3% of Compustat-listed firms are engaged in financial misrepresentation that is potentially sanctionable by regulators in an average year. The average violation period is 3.1 years, implying that 7.2% of firms initiate financial reporting practices each year that are potentially sanctionable. Of these firms, 3.5% eventually are sanctioned by regulators. We use these findings to estimate the size of the price distortions imposed by misrepresentation on the shares of both misrepresenting and non-misrepresenting firms. We also estimate the size of firms’ ex ante expected costs of engaging in financial misrepresentation that incorporate both the probability of getting caught and the penalties if caught.