John Puthenpurackal

The Determinants and Performance Impact of Outside Board Leadership

Outside board chairs are more likely in firms that are smaller, have greater stock volatility and R&D intensity, have a lower proportion of inside directors and less institutional ownership, and when CEOs have shorter tenure and lower ownership. We also find the existence of an outside chair associated with geographical and industry norms. An outside chair is positively associated with firm performance, a finding robust to various estimation methods including event study and multivariate analyses incorporating controls for endogeneity, as well as market and accounting measures of performance. We note however, the outside chair-firm performance relationship varies with firm characteristics.

Board Networks and the Cost of Corporate Debt

This paper examines how the extent of industrial firms’ connectedness to other firms through board interlocks is associated with their bond yield spreads. We hypothesize that the transmission of more “soft” information about better connected firms would lower information asymmetries of such firms, potentially lowering the perceived riskiness of their bonds. Using bid-ask spread as a measure of information asymmetry and a sample of 5,402 bond-year observations over the 1994-2006 period, we find that greater connectedness is associated with statistically and economically significant lower bond yield spreads, ceteris paribus. Supporting the information flow hypothesis, we find larger benefits from greater connectedness for firms with higher information asymmetries and for firms with more extensive ties to financial firms. Overall, our findings suggest that firms obtain benefits from being better networked in the form of lower borrowing costs.

Related Party Transactions, Corporate Governance and CEO Compensation

Examining the years 2001–2012, we document a decrease in reported CEO related party transactions (RPTs) and an increase in reported outside director RPTs, with the largest change occurring around the 2006 Securities and Exchange Commission (SEC) RPT disclosure changes. Our analysis of the determinants of RPTs and their association with CEO compensation also shows an impact of the SEC disclosure change, as we find support for the weak governance hypothesis in the pre-2006 period and some support for the efficient contracting hypothesis post-2005. While our results vary by model, pre-2006, consistent with weak governance we find that outside director RPTs are positively associated with CEO compensation, with our estimates of the impact ranging from 8 to 18% depending on the model. In the post-2005 period, this result dissipates, and we find some evidence consistent with the efficient contracting hypothesis. Overall we find that the SEC RPT disclosure change appears to have had a significant impact on reported RPTs, the determinants of those RPTs, and the impact of those RPTs on CEO compensation.

The Impact of Go-Shop Provisions in Merger Agreements

Go-shop provisions in merger agreements significantly alter the selling process by allowing active solicitation of new bids after a merger agreement is signed with a particular bidder. Using a large sample of merger agreements from 2003 to 2012, we examine whether go-shops are used to benefit target shareholders or for agency/entrenchment reasons. We find that go-shop provisions are more likely in deals involving negotiation selling method, financial buyers and all cash financing, and in targets with less valuation uncertainty, higher prior stock returns and higher institutional ownership. We find that go-shops have a positive association with the initial offer premium. We also find deals with go-shop provisions are more likely to have a competing bid and an upward revision of the initial offer premium, resulting in higher final target premiums, particularly for negotiation deals. Collectively, our results indicate that go-shops are effective contractual devices used to further target shareholder interests.