Abstract: This dissertation explores whether certain incentives faced by managers and directors of firms entice them to uphold their duty of loyalty to shareholders. Shleifer and Vishny (1997) posit that \'corporate governance deals with the ways suppliers of finance to corporations assure themselves of getting a return on their investment.\' Strong corporate governance depends on the firm being able to provide managers and directors with proper incentives to ensure that shareholder funds are not expropriated or wasted on unattractive investments. Agency problems such as managerial opportunism and inefficient monitoring by directors are the focus of the three essays in this dissertation. The specific corporate governance mechanisms studied are those that provide (1) incentives for directors to dissent in boardroom disagreements, (2) incentives to commit insider trading by top managers, and (3) the incentives for directors to punish CEOs for perpetuating accounting fraud. In my first essay, I focus on director incentives to dissent in boardroom conflicts by exploring whether directors who resign in dissent from their board are rewarded in the labor market for directors. Using a hand collected sample of 278 boardroom disputes reported in 8-K filings during 1995–2006, I show that firms which have disputes are small, highly levered, have poor profitability, and have boards dominated by management. I find that dissent is not rewarded. For all types of directors across all types of disputes, directors who resign in protest experience a net loss in board seats of 85% and a net loss in director compensation of 46% over the five year period following the dispute. This means dissenting directors are not able to recover the seat or the compensation they give up. However, the dissenting directors who do obtain new board seats go to better firms (better performance, stronger corporate governance) that pay them more. For these dissenting directors it appears that dissent is its own reward. In my second essay I focus on the incentives of managers to commit illegal insider trading. Using a sample of all top management who were indicted for illegal insider trading in the United States for trades during the period 1989–2002, we explore the economic rationality of this white-collar crime. If this crime is an economically rational activity in the sense of Becker (1968), where a crime is committed if its expected benefits exceed its expected costs, \"poorer\" top management should be doing the most illegal insider trading. This is because the \"poor\" have less to lose (present value of foregone future compensation if caught is lower for them.) We find in the data, however, that indictments are concentrated in the \"richer\" strata after we control for firm size, industry, firm growth opportunities, executive age, the opportunity to commit illegal insider trading, and the possibility that regulators target the \"richer\" strata. We thus rule out the economic motive for this white-collar crime, and leave open the possibility of other motives. My third essay considers the incentives of directors to punish CEOs who perpetuate accounting fraud. We re-examine why CEOs remain in power in over half of the firms that intentionally misreport earnings. The failure of directors to use CEO dismissal as a reputation-cleansing device is even more puzzling after SOX, as regulators adopt non-prosecution policies for firms that self-police. We find that CEOs are more likely to remain when conventionally independent directors and CEOs appear to collude. That is, when both benefit from selling as insiders before the delinquent accounting is revealed, and when directors ratify one or more value-destroying mergers during the restatement period. We find retention is less likely when the misreporting is more severe and directors fear greater penalties from owners, lenders, and the SEC. Our results are robust to controlling for explanations based on the cost of replacing CEOs, the effectiveness of corporate governance, and the use of CFOs as scapegoats—that have been offered in prior research. Overall, our analysis of directors\' personal incentives increases the explanatory power of the retention decision by approximately 30%. It suggests collusive trading and merger ratification as additional (and observable) means of assessing the independence of outside directors.
Keywords: Accounting restatements,Board of directors,CEO turnover,Director dissent,Governance, Insider trading