Thesis on shareholder right and managerial entrenchment

Abstract

This dissertation consists of two empirical essays on shareholder right and managerial entrenchment. The essays investigate how shareholder protections affect firm’s response to banking crisis, and how shareholder activism affects managerial voluntary disclosure. In the first essay, I assess the following question: Do stock markets act as a “spare tire” during banking crises, providing an alternative corporate financing channel and mitigating the economic severity of banking crises? Using firm-level data in 36 countries from 1990 through 2011, I find that the adverse consequences of banking crises on equity issuances, firm profitability, employment, and investment efficiency are smaller in countries with stronger shareholder protection laws. These findings are not explained by the development of stock markets or financial institutions prior to the crises, the severity of the banking crisis, or overall economic, legal, and institutional development. The evidence is consistent with the view that stronger shareholder protection laws provide the legal infrastructure for stock markets to act as alternative sources of finance when banking systems go flat, easing the impact of the crisis on the economy. The second essay investigates how shareholder activism affects managerial disclosure behavior. In particular, I explore the impact of managerial entrenchment on firms’ voluntary disclosure. To establish a causal link, I employ a Regression Discontinuity Design (RDD) on the outcomes of shareholder voting on entrenchment-related proposals. A proposal that passes or fails by a small margin generates some exogenous variations in entrenchment. The empirical evidence suggests that mitigated managerial entrenchment promotes information disclosure. Specifically, passing a shareholder proposal leads managers to (a) become more likely to provide forward-looking information in the form of earnings forecasts, and issue forecasts more frequently; (b) make more precise and timely forecasts; (c) improve their forecasts accuracy; and (d) become more conservative and disclose more negative information. The empirical evidence is consistent with an Aligned Incentive Hypothesis: with better aligned incentives, less entrenched managers are induced to disclose more information, thereby enhancing transparency.