Essays on corporate governance

Abstract

This dissertation consists of three essays that investigate the determinants and impacts of modern corporate governance. The first essay examines the relationship between corporate governance and a company's ability to withstand crises. We analyzed data from over 6,700 firms across 61 economies to determine how corporate characteristics affect stock returns during the COVID-19 pandemic. Our findings show that companies with more corporate social responsibility activities and less entrenched executives experienced a milder drop in stock returns. Additionally, firms controlled by families, large corporations, and governments performed better than those owned by hedge funds or other asset management companies. Interestingly, while small amounts of managerial ownership were positively priced by stock markets during the pandemic, high levels of managerial ownership had a negative impact on stock returns. The second essay explores a little-studied motivation for board of directors. By utilizing unique characteristics of the Chinese financial market, we assess how independent directors' perceptions of the probability of receiving regulatory penalties impact their monitoring activities. Our findings indicate that these directors are more inclined to vote against management after witnessing another director in their network receive a regulatory penalty due to negligence. This effect persists over time and is stronger if the observing and penalized directors share similar professional backgrounds or gender, and if the observing director works at a firm with a higher likelihood of being penalized. These results offer direct evidence that the possibility of facing penalties is an essential factor driving directors' behavior. The third essay examines the potential of decentralization as a governance solution in an environment where transparency and trust are lacking. The study investigates how the collapse of FTX affected investors' confidence in centralized exchanges (CEX) and their subsequent adoption of decentralized exchanges (DEX). Results indicate that DEX tokens experienced a 10% abnormal return compared to CEX tokens, and DEX gained 30% more market share after the bankruptcy. This suggests that when trust becomes more valuable, decentralized institutions become more popular. Further analysis reveals that transparent CEXs and media-endorsed DEXs were better equipped to handle such a crisis of trust.