Three Essays on Corporate Finance and Firm Dynamics

Abstract

“Change in corporate performance after firing CEO: A comparison between US and Japan” The relation between board independence and management monitoring intensity is a long-standing question in the literature. Employing firm performance after CEO dismissals, this paper investigates whether independent boards solve the managerial entrenchment problem more effectively. Shleifer and Vishny (1989) demonstrate the incentive of CEOs to make irreversible skill-specific investments to increase the cost of replacing them under weak monitoring. I extend their model, generating an expected decline in firm performance when an entrenched CEO is fired. I track firm performance after CEO forced turnover events between 2000 and 2007 in the US and Japan, where the independence of boards differs distinctively. I find evidence that firm performance improves after a forced CEO turnover in the US, but not in Japan, where the insider-dominant boards monitor the CEO. The performance improvement in the US is accompanied by substantial consolidations; US firms reduce their assets and their labor force by a magnitude of 6 to 8 times more than Japanese firms. In addition, I demonstrate that forced CEO turnover is not followed by performance improvement in US firms with less independent boards. Overall, the evidence suggests that CEOs are more entrenched under the weak monitoring of less independent boards. “Market response to CEO turnover announcement for dismissal events” This paper investigates stock returns to CEO turnover announcements for CEO dismissal cases in US and Japan. A stock price response to CEO turnover announcement potentially captures the impacts of CEO turnover on overall firm performance. Using CEO forced turnover events that were announced between 2000 and 2007 in public companies of US and Japan, I find that the capital market responds to CEO succession news positively, but stock returns are statistically insignificant in both countries. Furthermore, the results indicate that CEO turnover announcement is followed by economically and statistically significant positive abnormal returns when independent board monitors top management. A greater market response to CEO turnover announcement for the external succession is observed in US, but not in Japan. "Do firms change investment behavior before and after financial crisis?" Aftermath of financial crisis, slow recovery in private business investment is one primary concern of policy makers. This paper investigates the change in firms’ investment behavior before and after the financial crisis using 15-year quarterly financial data of 895 large firms in five advanced economies. I find a significantly positive relation between firm profitability and capital expenditure during the sample period from 1999 to 2014: firms increase 1% of capital expenditure to total asset ratio for 1% rise in ROA on average, which is consistent with findings in preceding studies (Fazzari et al., 1998; Kaplan & Zingales, 1997). However, the correlation between capital expenditure and cash flow disappears after the financial crisis. On the other hand, a linkage between R&D expenditure and cash flow emerges to be significantly positive. These results indicate the shift in corporate investment objective from tangible to intangible assets after the crisis.