Two Essays on Empirical Finance

Abstract

The dissertation consists of two chapters. The first chapter studies the effect of ownership by long-term passive institutions on CEO compensation duration. I exploit the exogenous variation in passive ownership associated with Russell Index reconstitutions to establish a causal link between passive institution ownership and CEO compensation duration. A one-standard-deviation increase in passive ownership leads to a 0.61-standard-deviation increase in compensation duration. To identify the channels through which passive institutions affect CEO compensation duration, I examine their proxy voting behavior. Increased passive ownership leads to a greater number of shareholder-sponsored compensation proposals, and passive institutions vote to support these proposals. Moreover, passive institutions decrease (increase) voting support on say-on-pay proposals when CEO compensation duration decreases (increases). Finally, I show suggestive evidence of behind-the-scenes engagement by passive institutions to influence CEO compensation duration. Overall, my findings indicate that passive institutions influence CEO compensation duration to align CEOs’ incentive horizons with their own long-term investment horizons. The second chapter studies whether value of corporate voting rights can explain (predict) future stock returns. Measuring value of corporate voting rights using options, we find that firms with higher value of voting rights experience lower future returns. Constructing portfolios based on an option-based measure of the value of voting rights yields average return spreads of about 80 basis points per month, and the return differences persist up to 12 months. Our results cannot be explained by models of informed trading, nor by liquidity, short-sale constraints or other factors known to affect stock prices. An alternative measure of vote value for dual class firms generates similar results. Our findings highlight the importance of the vote component of stock prices in understanding the cross section of stock returns.