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Corporate governance & agency

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Within a corporation, the separation of ownership and control may lead to conflicts of interests between insiders and outsiders. As documented empirically, in some companies, managers may engage in activities that are harmful to shareholders, such as devoting insufficient effort to their work, pursuing empire-building activities, and executing entrenchment strategies; in some other companies, controlling shareholders may expropriate minority shareholders, for example as our empirical research shows, through self-dealing activities like related party transactions.

These agency problems can exist, partially because of the flawed corporate governance. One issue that has attracted a great deal of attention is lack of transparency. For instance, one of our empirical finding is that, with looser disclosure rules, compensation consultants help managers get a higher pay. Besides transparency, another important issue is accounting manipulations, through which managers can increase their compensation or protect themselves from outside interventions like takeovers. 

In light of the detrimental consequence brought by these conflicts, we have aimed to examine, first the value of insiders to outsiders, which for example can be captured by the stock price reactions to sudden deaths of executives, and second how to measure the efficiency of corporate governance appropriately, like whether management dismissals is the best proxy for judging the effectiveness of monitoring mechanisms.

Based on the understanding of these agency issues, researchers including us have also explored how to align insiders' interests with outsiders'. One choice is to design optimal compensation package with the mixture of salary, bonus and stock/stock options. Another option is to introduce monitoring by external agents such as outside directors and stock analysts, in the form of either active or speculative monitoring. Admittedly, there are several concerns about how accountable the board of directors is. For example, one argument is that the board may lack independence. To investigate these concerns, a large amount of empirical studies have examined various related questions, like one of our papers is about how outside directors and firms are matched. Besides, corporate governance can be also be imposed by product-market competition. It works through two channels. One is to provide a comparable yard-stick to managers' performance. The other is to push managers to work hard due to the possibility of failure in the market competition which may further lead to bankruptcy. In addition, as we have shown, debt is another governance scheme to incentivise managers to make efficient (dis)investment decisions by adjusting the amount of cash flows they can grab. Moreover, the threat of takeover and leveraged buyouts can also discipline managers.

Helmers, C., Patnam, M. and Rau, P.R. (2017) "Do board interlocks increase innovation? Evidence from a corporate governance reform in India." Journal of Banking and Finance (DOI: 10.1016/j.jbankfin.2017.04.001) (published online April 2017; forthcoming in print)

Chu, J., Faasse J. and Rau P.R (2015) "Do compensation consultants enable higher CEO pay? New evidence from recent disclosure rule changes." (available online via the SSRN)

Do, Q-A., Nguyen B.D. and Rau P.R. (2015) "Sugar and spice and everything nice: what are independent directors made of?" (available online via the SSRN)

Nguyen B.D. and Nielsen, K.M. (2014) "What death can tell: are executives paid for their contributions to firm value?" Management Science, 60(12): 2994-3010 (DOI: 10.1287/mnsc.2014.2011)

Cheung, Y.-L., Rau, P.R. and Stouraitis, A. (2012) "How much do firms pay as bribes and what benefits do they get? Evidence from corruption cases worldwide." NBER Working Papers, No.17981. Cambridge, MA: National Bureau of Economic Research.

Nguyen, B.D. (2012) "Does the Rolodex matter? Corporate elite's small world and the effectiveness of boards of directors." Management Science, 58(2): 236-252 (DOI: 10.1287/mnsc.1110.1457)

Bigelli, M., Mehrotra, V. and Rau, P.R. (2011) "Why are shareholders not paid to give up their voting privileges? Unique evidence from Italy." Journal of Corporate Finance, 17(5): 1619-1635 (DOI: 10.1016/j.jcorpfin.2011.09.005) (available online via the SSRN)

Nguyen, B.D. and Nielsen K.M. (2010) "The value of independent directors: evidence from sudden death." Journal of Financial Economics, 98(3): 550-567 (DOI: 10.1016/j.jfineco.2010.07.004)

Cheung, Y.-L., Jing, L., Lu, T., Rau, P.R. and Stouraitis, A. (2009) "Tunneling and propping up: an analysis of related party transactions by Chinese listed companies." Pacific-Basin Finance Journal, 17(3): 372-393 (DOI: 10.1016/j.pacfin.2008.10.001) (available online via the SSRN)

Cheung, S., Qi, Y.-L., Rau, P.R., and Stouraitis, A. (2009) "Buy high, sell low: how listed firms price asset transfers in related party transactions." Journal of Banking and Finance, 33(5): 914-924 (DOI: 10.1016/j.jbankfin.2008.10.002) (available online via the SSRN)

Botsari, A. and Meeks, G. (2008) "Do acquirers manage earnings prior to a share for share bid?" Journal of Business Finance and Accounting, 35(5/6): 633-670 (DOI: 10.1111/j.1468-5957.2008.02091.x) (available online via the SSRN)

Lambrecht, B.M. and Myers, S.C. (2008) "Debt and managerial rents in a real-options model of the firm." Journal of Financial Economics, 89(2): 209-231 (DOI: 10.1016/j.jfineco.2007.07.007) (available online via the SSRN)

Cheung, Y.-L., Rau, P.R. and Stouraitis, A. (2004) "Tunneling, propping, and expropriation: evidence from connected party transactions in Hong Kong." Hong Kong Institute for Monetary Research Working Papers, No.2004/9. Hong Kong: HKIMR. (available online via the SSRN)

Dissanaike, G. and Papazian, A. (2004) "Management turnover in stock market winners and losers: a clinical investigation." European Corporate Governance Institute Working Paper Series in Finance, No.2004/61. Brussels: ECGI. (available online via the SSRN)