Essays on Corporate Finance

Abstract

The dissertation consists of three essays. The first essay examines the role of earnings per share (EPS)–tied performance metrics on firm value and share repurchase activity using compensation data from proxy statements. We find that firms are more likely to repurchase stock when CEO contracts are tied to EPS metrics. Because stock buybacks can potentially be beneficial for firms with low investment opportunities and high free cash flow, firms are grouped on these dimensions. Investors react positively when firms with low investment opportunities and high free cash flow add EPS-tied performance goals; in contrast, investors react negatively when firms with high investment opportunities and low free cash flows add such goals. The results are consistent with agency costs of free cash flow. Overall, this essay highlights the importance of EPS-tied performance metrics to firm value.

In the second essay, the effects of managers’ pay duration on mergers and acquisitions (M&As) activities are studied. We find that when short-horizon managers make announcement of an M&A deal, both the short-term and long-term abnormal returns are greater than the group of firms with long-horizon managers. Consistent with the positive reactions, M&As conducted by short-horizon managers have stronger post-M&A accounting performance in the short term and do not exhibit poor performance in the long term. The results are surprising when viewed against the conventional wisdom that giving managers short-term incentives is suboptimal and imply that long-term incentives are not necessarily optimal for all firms in all situations.

In the third essay, we revisit the controversial question of whether long-run abnormal returns are associated with major corporate events. Our analyses investigate M&As, initial public offerings (IPOs), seasoned equity offerings (SEOs), and dividend initiations. In an attempt to resolve ambiguous empirical evidence with respect to these events, we conduct a variety of tests for abnormal long-run performance, including buy-and-hold returns (BHARs), different calendar time approaches, and a recent standardized test. Empirical tests for these different methods consistently detect significant long-run abnormal returns for all four corporate events.