Three essays in corporate governance

This dissertation consists of three related papers on corporate governance, especially corporate board of directors. The focus was put on the examination, both theoretically and empirically, of the two major roles played by boards: monitoring and advising management, and whether and to what extent there is tradeoff between these two roles. I also examine corporate governance on bond ratings and spreads.;In Chapter 1 of my dissertation. I develop and test a model of the two primary functions of the board of directors of a public corporation: monitoring and advising management. The model shows that there is tradeoff between these two functions: advising management leads to lower monitoring quality and higher agency costs. It is therefore not optimal for the board to advise unless its ability to do so is sufficiently high to overcome these costs. To test the model, I use the number of independent directors who are at the same time executive board members of other corporations as an empirical proxy for the board's ability to advise. Consistent with the predictions of the model, I find that independent executives (IEs) are associated with lower monitoring quality and higher agency costs. I provide the first direct and comprehensive evidence for the advisory function of the board, by contrasting the corporate policies these executives choose for their own firms with those they advocate as IEs. I find that IEs are positively, significantly, and causally associated with firm performance. These results suggest that boards act optimally in balancing their monitoring and advisory functions, as predicted by the model. Finally, I argue that the significant relation between IEs and firm performance is due to the scarcity of IEs, and use the passage of Sarbanes-Oxley Act as a natural experiment to demonstrate the validity of this argument.;Chapter 2 of my dissertation is an extension of the theory in Chapter 1. I derive the optimal choice of advising role by directors given that every board has to perform a monitoring role. It is argued that advising management has cost as well as benefit. Even though advising increases the mean of the profit, board shouldn't advise unless its prior ability exceeds CEO's by a positive cutoff value. I prove that this cutoff value is higher under "strong owner" characterized by concentrated shareholding than "weak owner" characterized by diffused ownership structure, which suggests one potential negative effect imposed by large shareholder setup. I also prove that instead of committing to fire the board after one period to induce their advising benefit under large shareholder setup, shareholders might just be better off to be back to diffused ownership case, aside from the consideration of large shareholder extracting private benefit from the control of the corporation.;In Chapter 3 of my dissertation, we examine the empirical relations between the governance structure of public corporations in the United States and the rating and pricing of their debt securities. We study an unbalanced panel of 775 unique U.S. firms from 2001 through 2007 and identify several statistically significant relations between corporate governance factors and credit ratings, bond spreads and firm values. We find that credit ratings are negatively related to the presence of antitakeover measures for firms with speculative grade ratings and positively related to the presence of antitakeover measures for firms with investment grade ratings. Moreover, we find that spreads are positively related to the presence of antitakeover measures, and this relation is significantly stronger for firms with less than investment grade credit ratings. Our findings also suggest that more stable boards, defined as having attributes relating to board tenure, director liability indemnification and classified board structures are related to higher credit ratings and lower bond spreads. We conjecture that boards with greater stability may be better positioned to take into consideration the longer term interests of the firm as a whole, thus benefiting the firms' creditors.