Thesis advisor: Philip Strahan / In the first two essays of this dissertation, I examine the role of third-party debt collectors in consumer credit markets. First, using law enforcement as an instrument, I find that higher density of debt collectors increases the supply of unsecured credit. The estimated elasticity of the average credit card balance with respect to the number of debt collectors per capita is 0.49, the elasticity of the average balance on non-credit card unsecured loans with respect to the number of debt collectors per capita is 1.32. There is also some evidence that creditors substitute unsecured credit for secured credit when the number of debt collectors increases. Higher density of debt collectors improves recoveries, which enables lenders to extend more credit. Finally, creditors charge higher interest rates and lend to a larger pool of borrowers when the density of debt collectors increases, presumably because better collections enable them to extend credit to riskier applicants. In the second essay I investigate the economics of the debt collection industry. The existence of third-party debt collection agencies cannot be explained by the benefits of specialization and economies of scale alone. Rather, the debt collection industry can serve as a coordination mechanism between creditors. If a debt collection agency collects on behalf of several creditors, the practices it uses will be associated will all creditors that hired it. Hence, consumers will be unable to punish individual creditors for using harsh practices. As a result, the third-party agency may use harsher debt collection practices than individual creditors collecting on their own. As long as the costs of hiring third-party debt collectors are below the benefits from using harsh debt collection practices, the debt collection industry will create economic value for creditors. The last essay, written jointly with Thomas Chemmanur, develops a theory of corporate boards and their role in forcing CEO turnover. We show that in general the board faces a coordination problem, leading it to retain an incompetent CEO even when a majority of board members receive private signals indicating that she is of poor quality. We solve for the optimal board size, and show that it depends on various board and firm characteristics: one size does not fit all firms. We develop extensions to our basic model to analyze the optimal composition of the board between firm insiders and outsiders and the effect of board members observing imprecise public signals in addition to their private signals on board decision-making. / Thesis (PhD) — Boston College, 2011. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

Thesis advisor: Philip Strahan / In my first essay, I find that CEOs with more control over the firm have smaller compensation packages and are less likely to have severance contracts. Despite lower pay, these CEOs have longer tenure and their boards' replacement decisions are less sensitive to their performance, which is consistent with the view that there is a trade-off between pay and dismissal risk. To mitigate endogeneity concerns, I use divorce as an exogenous shock to CEO equity ownership, and find that following a divorce, turnover risk goes up and pay increases significantly. My findings highlight the importance of turnover risk in studying executive compensation. The second essay shows that staggered boards are associated with higher private benefits of control. We find that companies de-staggering their boards experience a decrease in control premiums. Using two court rulings in 2010 with opposite decisions on the effectiveness of staggered boards, we show that our findings are not driven by the endogeneity of the corporate control. Finally, we find evidence that the stock market reactions to the court rulings are negatively associated with the changes in control premium. Overall, our results suggest that staggered boards decrease shareholder value via entrenchment. In my third essay, I study the impact of accounting practices on debt renegotiations and covenant violations. Firms that recognize losses in a timelier manner (i.e., have more conservative accounting practices) have less slack at any given time and are more likely to violate loan covenants. But the consequences of a covenant violation by such firms differ from those of firms with aggressive accounting practices. I also find that firms with more conservative accounting practices are more likely to renegotiate their loans with creditors. / Thesis (PhD) — Boston College, 2015. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

In 1958, Modigliani and Miller initiated an important debate in modern corporate finance literature, when they stated that in the absence of taxes, the cost of capital of a firm is independent of its capital structure. They modified and then corrected their view in 1963 when they stated that the introduction of corporation taxes into their model implied that there is a tax advantage to leverage and therefore taxes influenced the cost of capital. Subsequently, in the 1970s and 1980s, this debate has focused on the interaction of personal taxes and corporation taxes with the cost of capital and on the determination of whether taxes influence the cost of capital at all. This thesis contributes to this debate by addressing the following issues: (a) Do personal taxes matter at all for calculating the cost of capital. How sensitive is the influence of personal taxes to differences in the capital structure and pay out policies of the firms. (b) How can more realistic features of the tax code be incorporated in the determination of the cost of capital. (c) Taxation systems can be classified into 4 main types according to the degree of integration of personal and corporation taxes. These systems are the Classical, Imputation, Two-Rate and the Integrated systems. The cost of capital, in the presence of uncertainty as well as corporation and personal taxes, is derived for each of the above systems in this thesis. (d) Taxation systems can also be classified into 2 main types according to the taxable base used. These are the Comprehensive Income Tax and the Expenditure Tax systems. The cost of capital, in the presence of uncertainty as well as corporation and personal taxes, is derived under both the above regimes. (e) Application of the results of (a), (b) and (c) above to address practical issues such as using the cost of capital equation to determine the effect of changes introduced by the 1988 Budget on the cost of capital. (f) Application of the results of (d) above to contradict the claims made in the Meade Committee regarding the tax neutrality issue. A system that is tax neutral even when uncertainty is taken into account, is proposed. All the above issues have the common theme of the determination of the appropriate cost of capital in the presence of both uncertainty as well as corporation and personal taxes. The conclusions reached are stated at the end of the relevant chapters.

This thesis examines topics in corporate finance and behavioral finance. First, I examine the effects of ownership structure on the amount of firm-specific information in stock prices, measured using synchronicity. With a unique dataset of 6,184 firm-year observations for Canadian companies listed on the Toronto Stock Exchange during 2000-2012, I find evidence of a significant, non-linear relationship between the size of the largest shareholder and synchronicity. Using propensity score matching (PSM) to isolate the effect of family firms on synchronicity, I find no evidence of a significant difference in synchronicity for matched pairs of family and non-family firms. Finally, I find evidence of a negative relationship between firms with multiple large controlling shareholders and synchronicity. Second, in a co-authored paper with Dr. Richard Deaves (McMaster University) and Dr. Brian Kluger (University of Cincinnati) we investigate the relationship between path-dependent behaviors (i.e., the disposition effect, house money effect and break-even effect) and investor characteristics (e.g., overconfidence and emotional stability) using experimental trading sessions. The majority of our subjects exhibit path-dependent biases and there are significant correlations between these biases. The correlations hint at the possibility that a common underlying factor may be driving all path-dependent behaviors. We also find some evidence that the existence of psychological bias (overconfidence and negative affect) leads to more bias in financial decision-making. Third, in co-authored work with Dr. Lucy Ackert (Kennesaw State University), Dr. Richard Deaves (McMaster University) and Dr. Quang Nguyen (Middlesex University) we report the results of an experiment designed to explore whether both cognitive ability (IQ) and emotional stability (EQ) impact risk preference and time preference in financial decision-making, finding evidence in support. Specifically, IQ impacts risk preferences and EQ impacts time preferences. Our results are primarily driven by our male participants. Most interestingly, EQ plays a role that is almost as meaningful as IQ when it comes to explaining preferences. / Thesis / Doctor of Philosophy (PhD)

This paper seeks to explain the frameworks that the risk accountant likely operates in. It begins with a discussion of risk in the business context. Then the paper examines existing frameworks in light of the work of management accountants. The paper looks more closely at the tools the management accountant has at his disposal to identify, assess, and communicate risk as well as issues surrounding the use of these tools such as the calculative culture of the firm and biases in risk perception. It is meant to be useful to academics pursuing future research in risk accounting and also to management accountants in risk management.

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Prior research on corporations finds that there exists a large unexplained firm-specific heterogeneity in corporate behaviors stemming from the effects of managers. This research identifies managerial personalities and tests their effects on corporate behaviors both experimentally and empirically. First, the effects of managerial personalities on corporate financing decisions are tested using a laboratory experiment with managers in South Korea. The laboratory experimental market is à la Modigliani and Miller but with two frictions, bankruptcy costs and corporate taxation. Leverage choices of managers with particular personality traits are compared against the optimal capital structure computed from the static trade-off theory. The results show that extravert managers choose higher leverage ratios, with the effect being financially meaningful although not statistically significant. Secondly, I identify extravert CEOs and empirically measure its effects on corporate financing choices using Chief Executive Officers’ avocation data and corporate financial data of public, nonfinancial US companies between 1992 and 2011. The results of mean comparisons by group, fixed effects regressions, difference-in-difference regressions, and changes of leverages around CEO turnovers show that extravert CEOs tend to issue risky debt more when accessing external finance and maintain higher leverage ratios than their peers. Thirdly, I test the effects of managerial extraversion on executive compensation. I first offer an empirical compensation model of managerial bargaining power, and then empirically tests the prediction by identifying a personality trait relevant to bargaining power using a novel set of managerial hobbies data. The results provide an evidence that CEO bargaining power has an increasing effect on CEO compensation.

This dissertation examines how the structures of compensation for executives and directors are affected by the possibility that managers can influence the risk of a firm's cash flows. In chapter 1, I consider a moral hazard model which shows that a strong pay-for-performance sensitivity in managerial compensation may deteriorate shareholder value when shareholders cannot monitor managerial risk-seeking activities. Intuitively, while high-powered managerial compensation provides the manager with incentives to increase the firm's value by exerting effort, it also creates managerial incentive to engage in (unproductive) risk-seeking activities. To test this prediction, I consider a regulatory change that makes it more difficult for managers to conceal information about the (speculative) use of derivative instruments. Specifically, I examine how the structures of compensation for executives and managers are affected by the adoption of a new accounting standard, the Statement of Financial Accounting Standard No. 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) which mandates the fair value accounting for derivative holdings. Consistent with the model prediction, I find that relative to other firms, derivative users (firms that traded derivatives before adopting FAS 133) increase the pay-for-performance sensitivity of CEO/CFO compensation. In Chapter 2, I extend the model by incorporating the realistic features that shareholders delegate to the (self-interested) board the tasks of monitoring managers and of setting their compensation contracts. My analysis shows that while high-powered board compensation induces the board to monitor the firm and to properly design managerial compensation, it also provides the board with incentives to misreport managerial risk-seeking activities and to engage in collusive behavior with the manager at the expense of shareholders. From these trade-offs, I develop a number of testable hypotheses and take them to the data. Consistent with the model predictions, I find that firms in which (i) managerial risk-seeking activities are more likely to occur (e.g., high R&D firms or banks) and (ii) board monitoring costs are likely to be lower (e.g., firms that have non-officer blockholders on the board) show weaker pay-for-performance sensitivity of board compensation and stronger pay-for-performance sensitivity of CEO compensation. / text

The effectiveness of traditional due diligence practices and whether they contribute to Merger and Acquisition (M&A) success or failure is an ongoing debate in finance research. This research report contributes to the debate by examining the effectiveness of traditional due diligence using a qualitative research approach. A dataset of traditional due diligence practices was compiled from the literature, which formed the basis for an interview which was conducted with corporate finance practices. The findings indicate that the traditional due diligence process is considered to be an evolving process, where due diligence practices of the last decade are considered to be significantly different from the due diligence required in acquisitions today. Due diligence is also considered to be indispensable, and its scope and importance underestimated. Furthermore, any perceived deficiency in a due diligence is not necessarily in concept, but rather in execution, with excessive focus on the accounting and legal aspects of a M&A, while neglecting the macro-environment, marketing, production, management and information systems. It is also concluded that most stakeholders have understood that failure to carry out proper due diligence could be financially damaging to the parties transacting. In an attempt to determine what due diligence means for the current as well as the future, this study uncovers a critical trend in the forms and manner of flawed due diligence practices and paves the way to a more strategic due diligence, which are useful for practitioners in the present and in the future for M&A success.

Corporate finance theory suggests that bank’s private information about borrowers lets them hold up borrowers for higher interest rates and that hold up power should increase with borrower risk, and if so, banks with private information about borrowers should increase their rates in recessions more than warranted by borrower risk alone. Studies have been concluded in other markets for these propositions, particularly for the US market. This paper has replicated these studies for an emerging economy (Republic of South Africa) to see if the findings will hold across dissimilar markets. Hold up cost is not just a function of information monopoly, Rajan, 1992 posits that firms with a higher probability of failure should suffer more from informational hold-up cost. The risk of failure is more pronounced during recession than in expansion and hence relationship banks with information monopolies are able to extract more rents in recession than warranted by borrower default risk alone. Using literature that suggest that information rents can be mitigated by multiple banking relationships, I investigated further, whether this problem of hold up cost can be mitigated through a different channel by studying credit spreads of firms that have publicly sourced funds, and continued to seek private funds in the South African market.Using LOANSPREAD as the dependent variable in a regression model, I find that loan spreads are higher for bank-dependent firms, rise in recessions and rise by a greater amount in recessions for bankdependent firms. In the context of this study I define bank-dependent firms as those firms who have issued no public bond. The key finding is that, indeed multiple banking relationships can reduce informational monopolies, but issuing public bonds can be another channel that South African firms can use to avoid being taken advantage of by financiers with information monopoly over competing financiers.