Anzhela Knyazeva

The Supply of Corporate Directors and Board Independence

Empirical evidence on the relations between board independence and board decisions and firm performance is generally confounded by serious endogeneity issues. We circumvent these endogeneity problems by demonstrating the strong impact of the local director labor market on board composition. Specifically, we show that proximity to larger pools of local director talent leads to more independent boards for all but the largest quartile of S&P 1500. Using local director pools as an instrument for board independence, we document that board independence has a positive effect on firm value, operating performance, fraction of CEO incentive-based pay, and CEO turnover. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Payout Policy, Agency Conflicts, and Corporate Governance

This paper examines the role of corporate governance for payout policy design from the perspective of pre-commitment. We test the effect of external and internal corporate governance on the design of payout policy and use of pre-commitment, level and structure of cash distributions, and firm dividend and repurchase behavior. We argue that firms use pre-commitment to dividend payments to mitigate the agency conflict due to poor governance. We argue that there is an important distinction between dividends and repurchases from the perspective of pre-commitment. Managers that deviate from the chosen dividend policy incur a cost due to a strong negative market response, which reinforces the pre-commitment role of dividends. On the other hand, the market treats share repurchases as more flexible, irregular payouts made at the managers discretion, which makes repurchases less effective at mitigating the agency conflict. Therefore, a standalone repurchase policy is not sufficient to mitigate the governance failure, introducing the need for dividend pre-commitment as part of payout policy. Empirically, we find that weak governance is associated with a greater emphasis on dividend pre-commitment in total payout composition. Firms with weak governance are also significantly less likely to use standalone repurchase policies as opposed to a dividends - only or a mixed dividends - repurchases payout policy. Costly dividend pre-commitment presents few benefits to well-governed managers. Instead, they either store excess cash in the firm or distribute it through repurchases. We find that the type of monitoring mechanism is relevant for predicting discretionary payouts. Given the generally strong investor protection level in the US, poorly monitored managers are not immune from firing and they will follow a costly dividend policy. Consistent with the proposed explanation, we find that firms with weak corporate governance on average pay higher dividends. The relation between dividends and governance is stronger for firms with high free cash flow. Managers faced with a high takeover threat (external monitoring) are more likely to repurchase and tend to repurchase more on average. On the other hand, strong internal governance (board, institutional blockholder) allows more accurate following of managerial actions and is associated with fewer cash distributions of any kind, including repurchases.

Employee Rights and Acquisitions

This paper examines the outcomes and characteristics of corporate acquisitions from the perspective of stakeholder-shareholder agency conflicts. Using state variation in labor protections, we find that acquirers with strong labor rights experience lower announcement returns. Combined acquirer and target announcement returns are also lower in the presence of strong labor rights. Our findings remain statistically and economically significant after we control for a range of deal, firm, industry and state characteristics and explore various channels for the labor rights effect. Overall, the evidence indicates that employee-shareholder conflicts of interest reduce shareholder gains from acquisitions.

Benefits of Focus vs. Heterogeneity: An Analysis of Corporate Boards

We study the costs and benefits of dispersion in directors’ incentives and ability within corporate boards. Director incentive is measured by their ownership in the firm and number of outside directorships help by each director. Director ability is measured based on the experience of directors in other industries and the age of the companies in other directorship appointments of each director. Directors exhibit a considerable amount of heterogeneity in their ownership in the firm, number of outside board appointments, and the characteristics of the other companies in which directors hold appointments. Firm and industry characteristics appear to affect the preference towards more versus less board heterogeneity. Board heterogeneity has significant effects on firm value and key firm decisions that cannot be explained by board composition, size, and expertise levels. Heterogeneity in director industry expertise is associated with lower firm value, which underscores the importance of focus in director appointments. Heterogeneity in director ownership incentives similarly has a negative effect on firm value. Heterogeneous boards compensate the CEO with less incentive pay and higher total pay. We also find that board heterogeneity is associated with lower cash holdings, higher dividends, and higher leverage.

The Benefits of Focus vs. Heterogeneity: Dissimilar Directors and Coordination within Corporate Boards

We examine dispersion in director characteristics within a board. Directors with different skills can augment the board’s overall expertise and decision making flexibility, but they also face coordination problems. Empirically, the negative effect of dispersion on value prevails. To establish causality, we exploit external constraints that prompt firms to deviate from optimal board dispersion levels, conduct an acquisition event study, and examine market reaction to dispersion changes following director appointments, departures and deaths. Firms with disperse boards experience adverse market reaction to acquisitions. Growth firms experience a negative reaction to dispersion increases. Board dispersion also affects value relevant firm decisions.We investigate the implications of dispersion in individual director characteristics within a corporate board for shareholder value. The presence of directors with dissimilar skill sets can augment the board’s overall information set and increase the flexibility and effectiveness of the board’s decision making. At the same time, greater variety of director characteristics within a board can raise coordination costs and adversely affect board functions. We find a negative relation between dispersion in director expertise and incentives within a board and firm value. Further, dispersion in director characteristics is associated with lower CEO incentive pay, higher cash and overall pay, lower cash holdings and investment spending, higher leverage, and higher dividends. To address causality concerns, we exploit external constraints that prompt firms to hire dissimilar directors. We also conduct an event study of M&A announcements and examine market reaction to changes in dispersion due to director appointments, departures and deaths. JEL classification: G30, G34

Dividend Smoothing: An Agency Explanation and New Evidence

In spite of considerable research into firm dividend behavior, dividend smoothing has eluded a definitive explanation. This paper provides an agency interpretation of dividend smoothing and offers evidence that variation in corporate governance and managerial incentive conflicts explains differences in intertemporal properties of dividends. We argue that smooth dividends are an alternative to traditional corporate governance mechanisms. Empirically, we document a greater degree of dividend smoothing, fewer dividend cuts, and a trend towards regular incremental dividend increases at firms with weak traditional monitoring mechanisms. The effect of governance on dividend changes is largest for firms with high free cash flow. We document consistent patterns for total shareholder payout and overall commitment to external claimholders. However, dividends and repurchases are not perfect substitutes and adjustments to repurchases are secondary to the weakly governed managers’ need to sustain dividends.

Product Market Competition and Shareholder Rights: International Evidence

This paper examines the interaction between product market competition and international differences in shareholder rights in relation to firm performance and corporate policies. In contrast to existing literature, we provide evidence of complementarities between product market competition and country shareholder rights protections. The benefits of shareholder rights protections for firm performance are conditional on the presence of a competitive industry environment. We find that stronger shareholder rights protections are associated with better firm performance in competitive industries. However, this relation is not significant in concentrated industries. Consistent results are obtained from the analysis of key corporate policies.

Soft and Hard Information and Signal Extraction in Securities Crowdfunding

We examine the impact of information flows on financing and the relative roles of hard information, soft information, and certification of issuer quality by third parties, using novel evidence from the US securities-based crowdfunding market. While hard information about the issuer’s financial condition and experience has only marginal relevance for offering outcomes, third-party certification of issuer quality as well as soft information about the issuer proxied by social media following plays a significant role in crowdfunding offerings. The relative roles of hard information and certification are greatest in offerings of more information-sensitive securities and when investors are less likely to derive nonpecuniary returns from participating in an offering. Further, there is evidence of partial substitution between different signals of issuer quality. Both third-party certification and issuer social media following are positively related to the valuation obtained by the issuer. Issuers tailor deal features, specifically, the choice of funding target flexibility and offering duration, to the level of information asymmetry about issuer quality. Finally, there is some evidence of geographic matching, with issuer characteristics and local availability of platforms affecting distance between issuers and platforms.

Financial Innovation in Microcap Public Offerings

This paper examines external financing of small and growth firms using a regulatory experiment in the US microcap market. The paper focuses on a new financing method for entrepreneurial firms – small public offerings under Regulation A, which was significantly expanded by 2015 amendments. Regulation A offerings serve as a financing alternative for issuers that seek public capital but are unable to conduct a traditional registered public offering. Compared to small registered public offerings, Regulation A involves fewer requirements and draws smaller, younger companies, often raising capital without intermediaries or on a best efforts basis. Regulation A companies raise less capital on average after accounting for their historical financials. The use of Regulation A increased significantly following the 2015 shock, particularly in market segments that had more private placements and traditional public offerings. Different types of issuers are pursuing Regulation A and registered offerings, and Regulation A does not appear to draw issuers away from traditional public offerings.

Foreign Issuer Puzzle in Emerging Growth Company IPOs

The prominence of foreign issuers in the US market has grown significantly over time. In this paper we examine the IPOs of foreign issuers around the 2012 JOBS Act, which provided emerging growth companies (EGCs) with disclosure and offering process accommodations. We find systematic differences in the effects of the EGC regime on foreign issuers, complementing existing evidence on domestic issuers. In particular, underpricing of foreign issuer IPOs decreases – rather than increases – under the EGC regime. We further find evidence that greater flexibility in pre-IPO access to potential investors, which is consistent with reduced valuation uncertainty, helps explain the lower underpricing of foreign EGC IPOs. We also find that the EGC status is associated with higher long-run returns for foreign issuers relative to other issuers. We conduct a number of robustness tests to show that our results are not explained by differences in issuer characteristics, likely confounding effects, or changes in other IPO costs. Our findings highlight the differential effects of regulatory shocks on foreign issuers accessing US markets.