Essays on corporate governance

My dissertation focuses on corporate governance and executive compensation. By relating the two components of the labor market outcome, job assignments and executive compensation, I investigate: (a) how pay levels and turnover dynamics are determined in the executive labor market, (b) the impact of the preceding labor market competition on corporate outcomes.;Chapter one studies complementarities between executive and firm characteristics to identify the sources of matching synergy. Productivity parameters reflecting the relative importance of various complementarities are structurally estimated through a multi-dimensional matching model. Complementarity between the diversification degree of the firm and the cross-industry experience of the manager and complementarity between the R&D intensity of the firm and the technical education of the manager are shown to be more important than the well-known size/talent complementarity. Further, executive compensation, announcement abnormal returns, subsequent Tobin's Q, and executive tenure duration are all higher for better executive-firm matches.;Chapter two is coauthored with Rajesh K. Aggarwal and Huijing Fu. Acharya, Myers, and Rajan (2011) theorize that self-serving actions and rent extraction by CEOs can be constrained by subordinate managers when the managers' efforts are needed in production. This force, which they call internal governance, works best when the CEO and the managers are both important to firm output, in the sense that their relative contributions to firm value are balanced. We empirically examine the effects of internal governance on firm investment and performance. We develop a measure of internal governance that captures the relative contribution of the CEO compared to non-CEO executives in firm value creation. Consistent with the theory, we find that there is a hump-shaped relation between relative contributions and corporate investment measured as either capital expenditures or R&D spending. We also find a hump-shaped relation between relative contributions and several measures of firm performance: Tobin's Q, ROA, and free cash flow. The hump-shaped relations between investment and relative contributions and between firm performance and relative contributions are more evident for firms with a greater age difference between the CEO and the managers, firms in growing industries, firms with non-founder CEOs, firms with weaker external monitoring, and firms in which internal managers are more likely to become CEO in the future. Further, neither external governance nor board governance diminishes the importance of internal governance. Overall, our results are strongly supportive of the theory.