Browsing by Subject "Stock Price Efficiency"

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    Essays On Corporate Governance
    (2017-11) Qi, Jin
    In the first essay, I examine how the threat of activist intervention affects firm innovation. I argue that when firm managers pursue innovation, firm stock price may reflect less precise information about the firm's fundamental value, which makes firm managers vulnerable to shareholder intervention. Under the threat of shareholder intervention, managers will be biased against innovation projects to minimize their job termination risk. Consistent with this mechanism, I find that: (1) increasing the threat of shareholder intervention has a significant and economically important negative impact on firm innovation; (2) the threat of shareholder intervention exerts less negative effects on firms that are more likely to have efficient stock prices (e.g., firms with more monitoring institutional investors and/or more financial analysts). To establish causality, I use a novel identification strategy that relies on a quasi-natural experiment of activist fund closures to generate exogenous variation in the level of shareholder intervention threat. The difference-in-differences estimates show that firm-level innovation significantly improves following exogenous activist fund closures. The results from this identification strategy suggest a negative causal effect of shareholder intervention threat on firm innovation. In the second essay, I examine the effects of shareholder derivative litigation on board effectiveness. Specifically, I investigate the effects of Delaware's judicially-led reforms in 2003. In response to the Sarbanes-Oxley Act, Delaware courts adjusted their corporate law jurisprudence, moving to a more restrictive application of the business judgment rule and more vigorous enforcement of officer and director fiduciary duties. By lowering the procedural hurdles to derivative litigation (e.g., demand requirement, and special litigation committee), the courts allowed more shareholder derivative lawsuits to survive pretrial motions to dismiss. These reforms have greatly enhanced the ability of shareholders to effectively pursue derivative litigation against corporate directors and officers. Using a sample of 2153 publicly-traded firms from 1999 to 2007 and the difference-in-differences method, I find that following the 2003 reforms, Delaware chartered corporations have exhibited higher CEO pay-for-performance sensitivity and greater CEO turnover-performance sensitivity than have non-Delaware firms. These results show that empowering shareholders to pursue derivative litigation provides high-powered incentives to directors to improve their corporate governance decisions.