This paper conducts powerful new tests of whether debt can mitigate the effects of agency and information problems. We focus on emerging market firms for which pyramid ownership structures create potentially extreme managerial agency costs. Our tests incorporate both traditional financial statement data and new data on global debt contracts. Our analysis is mindful of the potential endogeneity between debt, ownership structure, and value, and takes into account differences in the debt capacity of a firm’s assets in place and future growth opportunities. The results indicate that the incremental benefit of debt is concentrated in firms with high expected managerial agency costs that are also most likely to have overinvestment problems resulting from high levels of assets in place or limited future growth opportunities. Subsequent internationally syndicated term loans are particularly effective at creating value for these firms. Our results support the recontracting hypothesis that equity holders value compliance with monitored covenants, particularly when firms are likely to overinvest.

We provide an argument and present evidence that industry factors play an important role in corporate governance. In particular, an industry’s investment opportunities, product uniqueness, competitive environment, information environment, and leverage help explain its corporate governance structures. These factors can have quite different associations (in strength and direction) with the monitoring capabilities of the board of directors versus the shareholder orientation of corporate charter provisions. This suggests systematic differences in the relative costs and benefits of alternative monitoring mechanisms. A focus on firm influences within industries suggests that firm and industry factors contribute equally to the observed variation in governance structures. We also find evidence that firms ’ broad governance structures revert over time toward industry norms. The separation of ownership and control in corporations can result in costly agency conflicts between owners and managers. Impediments to monitoring and the existence of transactions costs imply that contracts alone cannot resolve such conflicts, giving rise to the need for governance structures (Hart (1995)). These corporate

this paper are those of the authors and do not necessarily reflect those of TIAA-CREF. We would

To ascertain whether the form of managerial compensation affects a firm’s long-term operating performance, we track IPOs for five years after the expiration of the stabilization period. New public companies perform better when managers receive a balanced combination of stock option grants and equity ownership. Firms with unbalanced compensation arrangements, large option grants and little equity ownership or vice versa, do not perform as well. This empirical finding is consistent with a theoretical explanation based on managerial risk aversion and the alignment of managerial and owner incentives.

Using rich and accurate data from Oslo Stock Exchange firms, we find that corporate governance matters for economic performance, insider ownership matters the most, outside ownership concentration destroys market value, direct ownership is superior to indirect, and that performance decreases with increasing board size, leverage, dividend payout, and the fraction of non–voting shares. These results persist across a wide range of single–equation models, suggesting that governance mechanisms are independent and may be analyzed one by one rather than a bundle. In contrast, our findings depend on the performance measure used and on the choice of instruments in simultaneous equations. The lack of significant relationships in tests allowing for endogeneity may not reflect optimal governance, but rather an underdeveloped theory of how governance and performance interact.

In this paper I develop a dynamic structural model in which a firm makes rational decisions to buy or sell assets in the presence of idiosyncratic and aggregate productivity shocks. By identifying equilibrium asset prices, the model produces an industry with a well-defined panel of firms and jointly analyzes firms ’ investment decisions and the aggregate activity of asset sales over the business cycle. It suggests that changes of productivity, rather than levels, affect firms ’ decisions- firms with rising productivity buy assets and firms with falling productivity choose to downsize (rising buys falling). On the aggregate level, industries with less persistent and highly dispersed productivity shocks experience more changes in productivity and therefore have greater asset sales. I calibrate my model by matching the simulated moments with empirical moments using plantlevel data from Longitudinal Research Database (LRD). Using the simulated panel, I show that most of the empirical evidence on asset sales is consistent with value-maximizing behavior: (1) firms which buy assets have higher valuation around the transaction, but lower long-run average — a result that was previously used to support the market-timing theory; and (2) small acquirers have higher returns during the acquisition year than do large acquirers.

We analyze the importance of Internal Revenue Service (IRS) monitoring to equity pricing in U.S. public firms. Our strong, robust evidence from large samples implies that equity financing is cheaper when the threat of an IRS audit is higher, enabling investors to learn more about the firm. Reflecting its first-order economic impact, our coefficient estimates translate into the cost of equity capital falling, on average, by 58 basis points when the expected probability of an IRS audit rises from 30.51 percent (the 25th percentile in our data) to 45.86 percent (the 75th percentile). In evidence supporting our second prediction, we find that the link between IRS oversight and equity pricing is stronger in firms with relatively poor corporate governance that experience worse agency problems. Consistent with recent theory on the corporate governance role that tax enforcement plays, our research suggests that a spillover benefit accompanying strict IRS monitoring is lower information asymmetry evident in equity financing costs.

This paper investigates whether the valuation effect of corporate governance depends on the degree of competition in the companies ' product markets in a large international sample covering 14 countries from the European Union (EU). Besides providing an out-of-sample test of previous U.S.-centered studies, the study uses more comprehensive and reliable measures of both product market competition and corporate governance. Consistent with the hypothesis that product market competition acts as a substitute for corporate governance as competitive pressure enforces discipline on managers to maximize firm value, our results show that corporate governance significantly increases firm value in non-competitive industries only. This result is robust to a large number of robustness checks including the use of alternative measures of competition and governance, a sample extension including six large non-EU countries, as well as using alternative regressions specifications.

We simultaneously analyze two mechanisms of the managerial labor market: CEO turnover and monetary remuneration schemes. Sample selection models and hazard analyses are applied to a random sample of 250 firms listed on the London Stock Exchange. Our approach yields novel results (compared to earlier UK research): the managerial remuneration and the termination of labor contracts play an important role in mitigating agency problems between managers and shareholders. Both the CEOs ’ industry-adjusted monetary compensation and CEO replacement are strongly performancesensitive. There is little evidence of outside shareholder monitoring whereas CEOs with strong voting power successfully resist replacement irrespective of corporate performance. CEO remuneration is more sensitive to stock price performance in firms with strong outside shareholders whereas remuneration in insider-dominated firms is more sensitive to measures of accounting returns. When stock prices decrease, CEOs seem to compensate disappointing stock performance by augmenting the cash-based compensation package. Finally, the presence of a remuneration committee has no significant

We present evidence that individuals make political contributions strategically by targeting politicians with power to affect their economic well-being. Individuals in Congressional districts with greater industry clustering tend to support politicians with jurisdiction over the industry. The effect is stronger for Congressional committees with jurisdiction over more concentrated industries, in states with more concentrated industries and in states with higher unemployment. Individual political contributions are also associated with improvements in operating performance of firms in industry clusters. The relation between contributions and firm performance is strongest for poorly performing firms, firms closer to financial distress, and for contributions in close elections. The results imply that individual political contributions are valuable to firms, especially during bad economic times.