This dissertation examines the effect of various corporate governance mechanisms on firm risk taking. The first essay examines the effect on firm risk through the CEO ability channel, while the second essay examines the effect on firm risk through the institutional investor channel. This first essay investigates CEO risk management ability. Using CEO education as a proxy for ability I examine the relationship between CEO education and various types of risk: (1) market risk, (2) credit risk, and (3) operational risk. Propensity score methods are used as a way to deal with the endogenous matching problem which exists in the executive compensation literature. These methods are proposed as an alternative to the managerial fixed effects approaches such as ``spell fixed effects'' and the mover dummy variable method (MDV). While the managerial fixed effects methods would fail when the explanatory variables of interest are time-invariant, it is possible to capture this variation in managerial effects by using propensity score methods. I find that the effect on the various types of risks varies by the type of risk and by the type and quality of education. Firms with CEOs that have law degrees and actuarial credentials are associated with fewer operational risk events. While firms with CEOs that have MBA degrees are able to manage market risk better than their peers. Overall, the quality of CEO education matters, and in many cases it is associated with a simultaneous reduction in firm risk and increase in firm value. This second essay investigates the impact of institutional shareholder ownership on firm risk taking. I find a negative relationship between the aggregate institutional ownership percentage and firm risk taking. I also find that institutional ownership concentration induces risk taking. In addition, the effect on firm risk is stronger when institutional shareholders have majority control. The results provide support for both the prudent-man law and the large institutional shareholder hypotheses. Furthermore, the results are robust to quasi-experimental approaches including propensity score matching and doubly robust estimation. These findings provide additional evidence on the benefits and incentives of institutional shareholder monitoring. / Business Administration/Risk Management and Insurance

This dissertation studies the association between CEO ability and various aspects of corporate governance, specifically firm performance, executive compensation contracts and firm opacity. In the first essay of this dissertation (Chapter 2), I examine the effect of CEO ability on firm performance. My analysis uses a unique instrument of CEO ability that is based on a CEO's commitment decisions in US presidential elections. Intuitively, CEO ability is measured based on how well they forecast US presidential elections, one year prior to the race, relative to the candidates expected chances of winning. I find that this instrument of CEO ability is positively related to firm performance. Interestingly, I find that high ability CEOs have a greater impact on Tobin's q in small firms than in large firms. Yet, high ability CEOs have the greatest dollar impact on shareholder value in large firms. In addition, CEO ability appears to be quite important to outside shareholders in high growth firms. Lastly, I find that CEO ability is positively associated to merger announcement returns, which implies that higher ability CEOs engage in value-creating merger activities. The results are robust to industry and time controls, as well as various tests that consider an alternative explanation focusing on political influence. The second essay (Chapter 3) explores the effect of CEO ability on the structure and level of compensation contracts. I find that CEO ability is positively associated with total compensation level. CEOs in the highest quartile of the ability proxy earn almost $2.2 million more than CEOs in the lowest quartile of CEO ability. Further analysis indicates that CEO compensation structure differs markedly between the highest and lowest ability CEOs. Specifically, I find that the high ability CEOs receive 2.1% more stock based incentives than low ability CEOs. Thus, the low ability CEOs receive more of their pay in the form of cash compensation than do high ability CEOs. Further tests indicate that high ability CEOs have significantly greater variance in their pay than low ability CEOs, specifically due to the higher variance in stock based incentives. Overall, I provide evidence that CEO pay is associated with CEO ability and that CEO ability appears a key issue in designing CEO compensation contracts. In the third essay (Chapter 4), I examine whether CEO ability is related to corporate opacity. I argue that high-ability CEOs may seek to create greater transparency to convey their ability to the market. Simultaneously, low-ability CEOs may be signal-jamming the market's inferences about their talent by limiting the available information. An alternative aspect is that the results are driven by low-ability CEOs who seek to work in opaque firms. My analysis indicates that firms with high-ability CEOs are significantly less opaque than firms with low-ability CEOs. These findings are also robust to using a propensity score matched sample. Finally, I show that the deteriorating impact of corporate opacity on firm performance decreases when the decision belongs to a high-ability CEO, suggesting that opacity is not necessarily value-destructing decision for corporations. Overall, my analysis suggests that CEO ability is an important factor for corporate opacity. / Business Administration/Finance