Essays in empirical financial economics

Chapter 1 of this dissertation is based on my working paper, "On the Investment Bank Fixed Effects in Mergers and Acquisitions." This paper investigates whether and how first-tier investment banks affect the acquisition decisions and acquisition returns of their equity underwriting clients. I create an investment bank-client firm matched panel data set during the period from 1995 to 2002. To account for potential selection bias concern, I construct a proxy for acquiring firms' acquisition propensity and employ difference-in-difference methodology using mergers between investment banks as exogenous shocks. I find that there are, statistically and economically, significant positive investment bank fixed effects on both the acquisition likelihood and acquisition frequency of client firms. These positive investment bank fixed effects are caused, at least partially, by the investment banks' self-interest in ensuring more deals in order to collect more advisory fees. I also find that the market has a negative reaction to mergers and acquisitions in which acquiring firms employ as advisors investment banks with a prior underwriting relationship. Furthermore, investment bank influence appears to be effectively curbed in firms with lower executive in-the-money options and a higher fraction of independent directors.; Chapter 2 of this dissertation is based on my working paper, "Effects of Compensation and Governance on Securities Fraud." This paper empirically examines the joint effects of executive compensation and corporate governance on the likelihood of a firm committing security fraud. I examine a sample of U.S. public firms that were sued in private securities class action lawsuits or accused of fraud by the SEC between 1996 and 2003, and compare them to firms not accused of securities fraud during the same period. To deal with potential endogeneity concerns, I include firm-specific effects in regressions to capture time-invariant firm heterogeneity and construct a proxy for the true incidence of fraud using case settlement rather than fraud allegations only. I find consistent evidence of a positive relation between stock-based executive compensation and securities fraud likelihood. Moreover, I find that the positive relation between stock-based incentive pay and securities fraud likelihood is stronger in firms with certain governance mechanisms.