Corporate Governance Mechanisms and Firm Performance:Evidence from Finland

This paper examines the association between corporate governance attributes and firm performance of Finnish firms during 1990 – 2000. The empirical results suggest that corporate governance matters for firm performance. First, univariate test results indicate that firms characterized by a high (efficient) level of corporate governance have delivered greater stock returns, are higher valued based on the measure of Tobin’s Q, and exhibit higher ratios of cash flow to assets, on average, in comparison to their counterparts characterized by a low (inefficient) level of corporate governance. Second, controlling for a number of well-known determinants of stock returns, we find evidence that firms categorized by inefficient corporate governance have delivered inferior returns to shareholders during the investigation period. Finally, after controlling for several common determinants of firm value, we find that firms characterized by efficient corporate governance have been valued higher during the investigation period, measured by Tobin’s Q.

Essays on corporate governance, stakeholders, and restructuring

This dissertation consists of an introductory section and three theoretical essays analyzing the interaction of corporate governance and restructuring. The essays adopt an incomplete contracts approach and analyze the role of different institutional designs to facilitate the alignment of the objectives of shareholders and management (or employees) over the magnitude of corporate restructuring. The first essay analyzes how a firm's choice of production technology affects the employees' human capital investment. In the essay, the owners of the firm can choose between a specific and a general technology that both require a costly human capital investment by the employees. The specific technology is initially superior in using the human capital of employees but, in contrast to the general technology, it is not compatible with future innovations. As a result, anticipated changes in the specific technology diminish the ex ante incentives of the employees to invest in human capital unless the shareholders grant the employees specific governance mechanisms (a right of veto, severance pay) so as to protect their investments. The results of the first essay indicate that the level of protection that the shareholders are willing to offer falls short of the socially desirable one. Furthermore, when restructuring opportunities become more abundant, it becomes more attractive both socially and from the viewpoint of the shareholders to initially adopt the general technology. The second essay analyzes how the allocation of authority within the firm interacts with the owners' choice of business strategy when the ability of the owners to monitor the project proposals of the management is biased in favor of the status quo strategy. The essay shows that a bias in the monitoring ability will affect not only the allocation of authority within the firm but also the choice of business strategy. Especially, when delegation has positive managerial incentive effects, delegation turns out to be more attractive under the new business strategy because the improved managerial incentives are a way for the owners to compensate their own reduced information gathering ability. This effect, however, simultaneously makes the owners hesitant to switch the strategy since it would involve a more frequent loss of control over the project choice. Consequently, the owners' lack of knowledge of the new business strategy may lead to a suboptimal choice of strategy. The third essay analyzes the implications of CEO succession process for the ideal board structure. In this essay, the presence of the departing CEO on the board facilitates the ability of the board to find a matching successor and to counsel him. However, the ex-CEO's presence may simultaneously also weaken the ability of the board to restructure since the predecessor may use the opportunity to distort the successor's project choice. The results of the essay suggest that the extent of restructuring gains, the firm's ability to hire good outside directors and the importance of board's advisory role affect at which point and for how long the shareholders may want to nominate the predecessor to the board.

Traditional Village Governance (Desa Adat) and Inter-ethnic Conflict in Bali : A Study of Conflict between Balinese and Migrants: Cases from Municipality of Denpasar

Regional autonomy in Indonesia was initially introduced as a means of pacifying regional disappointment at the central government. Not only did the Regional Autonomy Law of 1999 give the Balinese a chance to express grievance regarding the centralist policies of the Jakarta government but also provided an opportunity to return to the regional, exclusive, traditional village governance (desa adat). As a result, the problems faced by the island, particularly ethnic conflicts, are increasingly handled by the mechanism of this traditional type of governance. Traditional village governance with regard to ethnic conflicts (occurring) between Balinese and migrants has never been systematically analyzed. Existing analyses emphasized only the social context, but do not explain either the cause of conflicts and the ensuing problems entails or the virtues of traditional village governance mechanisms for mediating in the conflict. While some accounts provide snapshots, they lack both theoretical and conflict study perspective. The primary aim of this dissertation is to explore the expression and the causes of conflict between the Balinese and migrants and to advance the potential of traditional village governance as a means of conflict resolution with particular reference to the municipality of Denpasar. One conclusion of the study is that the conflict between the Balinese and migrants has been expressed on the level of situation/contradiction, attitudes, and behavior. Yet the driving forces behind the conflict itself consist of the following factors: absence of cooperation; incompatible position and perception; inability to communicate effectively; and problem of inequality and injustice, which comes to the surface as a social, cultural, and economic problem. This complex of factors fuels collective fear for the future of both groups. The study concludes that traditional village governance mechanisms as a means of conflict resolution have not yet been able to provide an enduring resolution for the conflict. Analysis shows that the practice of traditional village governance is unable to provide satisfactory mechanisms for the conflict as prescribed by conflict resolution theory. Traditional village governance, which is derived from the exclusive Hindu-Balinese culture, is accepted as more legitimate among the Balinese than the official governance policies. However, it is not generally accepted by most of the Muslim migrants. In addition, traditional village governance lacks access to economic instruments, which weakens its capacity to tackle the economic roots of the conflict. Thus the traditional mechanisms of migrant ordinance , as practiced by the traditional village governance have not yet been successful in penetrating all aspects of the conflict. Finally, one of the main challenges for traditional village governance s legal development is the creation of a regional legal system capable of accommodating rapid changes in line with the national and international legal practices. The framing of the new laws should be responsive to the aspirations of a changing society. It should not only protect the various Balinese communities interests, but also that of other ethnic groups, especially those of the minority. In other words, the main challenge to traditional village governance is its ability to develop flexibility and inclusiveness.

Corporate Governance in European Banks: Essays on Bank Ownership

Banks are important as they have a central role in the financial system, where funds are channelled either through financial intermediaries, such as banks, or through financial markets, hence promoting growth in any economy. Recently, we have been reminded of the drawbacks of the central role of banks. The current financial crisis, which started out as a sub-prime mortgage crisis in the US, has become a global financial crisis with substantial impact on the real economy in many countries. Some of the roots to the current financial crisis can be sought in the changing role of banks and in bank corporate governance. Moreover, the substantial revitalising measures taken have been justified by the central role of banks. Not only are banks important, they are also very special. The fact that banks are regulated in conjunction with greater opacity, make bank corporate governance different from corporate governance in non-bank companies. Surprisingly little is, however, known about bank corporate governance, in particularly, in a European setting. Hence, the objective of this doctoral thesis is to provide new insights in this research area by examining banks from 37 different European countries. Each of the three essays included in the doctoral thesis examines a particular aspect of bank corporate governance. In the first essay the interaction between the regulatory environment a bank operates in and its ownership structure is explored. Indicators of the severity of the moral hazard problem induced by the deposit insurance system and implicit too-big-to-fail government guarantee, particular features of deposit insurance systems as well as legal protection of shareholders, legal origin of a country and level of integration to the European community are used in the analysis. The empirical findings confirm previous findings on the link between legal protection of shareholders and ownership structure. Moreover, they show that differences in deposit insurance system features can explain some of the differences in ownership structure across European banks. In the second essay the impact of management and board ownership on the profitability of banks with different strategy is examined. The empirical findings suggest that the efficiency of these two particular corporate governance mechanisms varies with the characteristics of the agency problem faced by the bank. More specifically, management ownership is important in opaque non-traditional banks, whereas board ownership is important in traditional banks, where deposit insurance reduces the monitoring incentives of outsiders. The higher profitability does, however, go together with higher risk. In the third essay the profitability and risk of commercial, savings and cooperative banks are compared. The empirical findings suggest that distinct operational and ownership characteristics rather than only the mere fact that a bank is a commercial, savings or cooperative bank explain the profitability and risk differences. The main insight from the three essays is that a number of different aspects should be addressed simultaneously in order to give the complexity of bank corporate governance justice.

Essays on Corporate Governance and the Quality of Disclosed Earnings: Across Transitional Europe

A growing body of empirical research examines the structure and effectiveness of corporate governance systems around the world. An important insight from this literature is that corporate governance mechanisms address the excessive use of managerial discretionary powers to get private benefits by expropriating the value of shareholders. One possible way of expropriation is to reduce the quality of disclosed earnings by manipulating the financial statements. This lower quality of earnings should then be reflected by the stock price of firm according to value relevance theorem. Hence, instead of testing the direct effect of corporate governance on the firm’s market value, it is important to understand the causes of the lower quality of accounting earnings. This thesis contributes to the literature by increasing knowledge about the extent of the earnings management – measured as the extent of discretionary accruals in total disclosed earnings - and its determinants across the Transitional European countries. The thesis comprises of three essays of empirical analysis of which first two utilize the data of Russian listed firms whereas the third essay uses data from 10 European economies. More specifically, the first essay adds to existing research connecting earnings management to corporate governance. It testifies the impact of the Russian corporate governance reforms of 2002 on the quality of disclosed earnings in all publicly listed firms. This essay provides empirical evidence of the fact that the desired impact of reforms is not fully substantiated in Russia without proper enforcement. Instead, firm-level factors such as long-term capital investments and compliance with International financial reporting standards (IFRS) determine the quality of the earnings. The result presented in the essay support the notion proposed by Leuz et al. (2003) that the reforms aimed to bring transparency do not correspond to desired results in economies where investor protection is lower and legal enforcement is weak. The second essay focuses on the relationship between the internal-control mechanism such as the types and levels of ownership and the quality of disclosed earnings in Russia. The empirical analysis shows that the controlling shareholders in Russia use their powers to manipulate the reported performance in order to get private benefits of control. Comparatively, firms owned by the State have significantly better quality of disclosed earnings than other controllers such as oligarchs and foreign corporations. Interestingly, market performance of firms controlled by either State or oligarchs is better than widely held firms. The third essay provides useful evidence on the fact that both ownership structures and economic characteristics are important factors in determining the quality of disclosed earnings in three groups of countries in Europe. Evidence suggests that ownership structure is a more important determinant in developed and transparent countries, while economic determinants are important determinants in developing and transitional countries.

Governance Matters : China's Developing Western Region with a Focus on Qinghai Province

This study is about governance in contemporary China. The focus is on Qinghai Province, one of the twelve provincial-level units included in the western region development strategy launched in 2000 by the government of China. Qinghai, the subject of the case study, is not a very well-known province. Hence, this study is significant, because it provides new knowledge about the province of Qinghai, its governance and diverse challenges, and deepens one s overall knowledge regarding China. Qinghai province is one of the slowest developing regions of China. My research problem is to analyze to what extent provincial development correlates with the quality of governance. The central concept of this research is good governance. This dissertation employs a grounded theory approach while the theoretical framework of this study is built on the Three World s approach of analyzing the three main themes, namely, the environment, economic development, and cultural diversity, and to support the empirical work. Philosophical issues in the humanities and contemporary theories of governance are brought in to provide deeper understanding of governance, and to understand to what extent and how characteristics of good governance (derived from the Western canon) are combined with Chinese tradition. A qualitative research method is chosen to provide a deeper understanding of the contemporary challenges of Qinghai (and China) and to provide some insight into the role and impact of governance on provincial development. It also focuses on the Tibetan ethnic group in order to develop as full an understanding as possible about the province. The challenges faced by Qinghai concern in particular its environment, economic development, and cultural diversity, all of which are closely interrelated. The findings demonstrate that Qinghai Province is not a powerful actor, because it has weak communications with the central government and weak collaboration with its stakeholders and civil society. How Qinghai s provincial government conducts provincial development remains a key question in terms of shaping the province s future. The question is how is Qinghai s government best able to govern in a way that is beneficial for the people. This study demonstrates that this is a significant question that challenges governance everywhere, and particularly in China given the absence of democracy. This study provides the ingredients for reflection as to how provincial government can be motivated to choose to govern in a sustainable way, instead of leaning on growth factors with too little consideration about the impact on the environment and the people.

Human brain mechanisms of auditory and audiovisual selective attention

Selective attention refers to the process in which certain information is actively selected for conscious processing, while other information is ignored. The aim of the present studies was to investigate the human brain mechanisms of auditory and audiovisual selective attention with functional magnetic resonance imaging (fMRI), electroencephalography (EEG) and magnetoencephalography (MEG). The main focus was on attention-related processing in the auditory cortex. It was found that selective attention to sounds strongly enhances auditory cortex activity associated with processing the sounds. In addition, the amplitude of this attention-related modulation was shown to increase with the presentation rate of attended sounds. Attention to the pitch of sounds and to their location appeared to enhance activity in overlapping auditory-cortex regions. However, attention to location produced stronger activity than attention to pitch in the temporo-parietal junction and frontal cortical regions. In addition, a study on bimodal attentional selection found stronger audiovisual than auditory or visual attention-related modulations in the auditory cortex. These results were discussed in light of Näätänen s attentional-trace theory and other research concerning the brain mechanisms of selective attention.

Kilpailukykyvaltion koululainsäädännön rakentuminen : Suomen eduskunta ja 1990-luvun koulutuspoliittinen käänne

Finnish education policy, educational legislation and the entire education system changed significantly during the 1990s as part of a general restructuring of public administration. There has been a clear divergence from the former tradition of a system of regulation, founded on detailed legislation and the principle of equality. The new governance, which is based more on individual choice, efficiency and evaluation, emphasizes that the development of a high standard of education is a necessity in the light of global competition. This study explores the legislative process regarding education policy in the Finnish Parliament during the 1990s, and highlights in particular how the international discourse on education policies was restructured in the context of Finnish legislation. The research material consists of all the public parliamentary documents relating to education, including government proposals, minutes from the discussions in the chamber and archive material (final protocols, reports and statements) for the Committee for Education and Culture. The discourse on the process of drafting and passing education legislation is modelled on three interrelated policy technologies (market, management and performance), which are understood here as mechanisms connecting general political ideas to normative legislation. The changes in the regulation of education were part of a general public administration reform instigated during the mid 1980s. The research results will prove that during the left-right coalition cabinet of PM Harri Holkeri, new policy technologies affected the parliamentary discourse on education policy. This was particularly influenced by a change in the preconditions for the management of education that was created as a result of the numerous demands to deregulate and delegate decision-making authority to the local and school levels while rendering the whole education system more effective. At the turn of the decade, market-type mechanisms were more indirectly manifested in the forms of individuality and freedom of choice, which were reflected, for example, in proposals to “lower the hurdles” by separating general from vocational secondary education with a view to encouraging students to select courses from other educational establishments, in addition to relaxing the requirements for establishing private schools and abolishing a hundred-year-old strict national catchment-area system. Later, in the course of the 1990s, after the subjects, players, and methods of evaluation had been more precisely defined, evaluation based on performance would result in the active measurement of the attainment of set objectives. In the spring of 1991, from the outset of PM Esko Aho's right-centre coalition cabinet, the education budget suffered cutbacks as a result of a global recession and this influenced the legislative work of, and discourses in, parliament. Representatives of the parties in power regarded the recession solely as an external factor that was remote from the political arena. In their view, the education system should rise to the challenge by ensuring the efficient and innovative use of the resources available and by developing new forms of indicators for evaluating results. Representatives of the opposition opposed the cabinet’s standpoint as a result of the recession, criticized the measures taken by pointing out the harmful effect of constantly cutting the budget and argued that the government had made political capital out of the recession by using it as an opportunity to give more room to market, management and performance technologies within the Finnish education system. Criticism of the new education policy became even stronger during PM Paavo Lipponen's first “rainbow” coalition cabinet with critical views being expressed not only from the opposition but also from representatives within the government. Representatives from the left demanded legislative restrictions and the instigation of measures to relieve the presumed negative effects of market, management and performance in the name of educational equality. The new management by results steering method within the university sector and the introduction of commercial education services in compulsory education were fiercely criticized. The argument over “setting outer limits” including, for example, the demands for more detailed legislation and earmarked state subsidies was characteristic of Parliament’s legislative discourse in the latter part of the 1990s. Keywords: education policy, education legislation, Parliament of Finland

Cellular Mechanisms of Sleep Homeostasis : Studies on Brain Energy Metabolism and Aging

Sleep is governed by a homeostatic process in which the duration and quality of previous wake regulate the subsequent sleep. Active wakefulness is characterized with high frequency cortical oscillations and depends on stimulating influence of the arousal systems, such as the cholinergic basal forebrain (BF), while cessation of the activity in the arousal systems is required for slow wave sleep (SWS) to occur. The site-specific accumulation of adenosine (a by-product of ATP breakdown) in the BF during prolonged waking /sleep deprivation (SD) is known to induce sleep, thus coupling energy demand to sleep promotion. The adenosine release in the BF is accompanied with increases in extracellular lactate and nitric oxide (NO) levels. This thesis was aimed at further understanding the cellular processes by which the BF is involved in sleep-wake regulation and how these processes are affected by aging. The BF function was studied simultaneously at three levels of organization: 1) locally at a cellular level by measuring energy metabolites 2) globally at a cortical level (the out-put area of the BF) by measuring EEG oscillations and 3) at a behavioral level by studying changes in vigilance states. Study I showed that wake-promoting BF activation, particularly with glutamate receptor agonist N-methyl-D-aspatate (NMDA), increased extracellular adenosine and lactate levels and led to a homeostatic increase in the subsequent sleep. Blocking NMDA activation during SD reduced the high frequency (HF) EEG theta (7-9 Hz) power and attenuated the subsequent sleep. In aging, activation of the BF during SD or experimentally with NMDA (studies III, IV), did not induce lactate or adenosine release and the increases in the HF EEG theta power during SD and SWS during the subsequent sleep were attenuated as compared to the young. These findings implicate that increased or continuous BF activity is important for active wake maintenance during SD as well as for the generation of homeostatic sleep pressure, and that in aging these mechanisms are impaired. Study II found that induction of the inducible NO synthase (iNOS) during SD is accompanied with activation of the AMP-activated protein kinase (AMPK) in the BF. Because decreased cellular energy charge is the most common cause for AMPK activation, this finding implicates that the BF is selectively sensitive to the metabolic demands of SD as increases were not found in the cortex. In aging (study III), iNOS expression and extracellular levels of NO and adenosine were not significantly increased during SD in the BF. Furthermore, infusion of NO donor into the BF did not lead to sleep promotion as it did in the young. These findings indicated that the NO (and adenosine) mediated sleep induction is impaired in aging and that it could at least partly be due to the reduced sensitivity of the BF to sleep-inducing factors. Taken together, these findings show that reduced sleep promotion by the BF contributes to the attenuated homeostatic sleep response in aging.

Levosimendan: Studies on its mechanisms of action and beyond

Acute heart failure syndrome represents a prominent and growing health problem all around the world. Ideally, medical treatment for patients admitted to hospital because of this syndrome, in addition to alleviating the acute symptoms, should also prevent myocardial damage, modulate neurohumoral and inflammatory activation, and preserve or even improve renal function. Levosimendan is a cardiac enhancer having both inotropic and vasodilatory effects. It is approved for the short-term treatment of acutely decompensated chronic heart failure, but it has been shown to have beneficial clinical effects also in ischemic heart disease and septic shock as well as in perioperative cardiac support. In the present study, the mechanisms of action of levosimendan were studied in isolated guinea-pig heart preparations: Langendorff-perfused heart, papillary muscle and permeabilized cardiomyocytes as well as in purified phosphodiesterase isoenzyme preparations. Levosimendan was shown to be a potent inotropic agent in isolated Langendorff-perfused heart and right ventricle papillary muscle. In permeabilized cardiomyocytes, it was demonstrated to be a potent calcium sensitizer in contrast to its enantiomer, dextrosimendan. It was additionally shown to be a very selective phosphodiesterase (PDE) type-3 inhibitor, the selectivity factor for PDE3 over PDE4 being 10000 for levosimendan. Irrespective of this very selective PDE3 inhibitory property in purified enzyme preparations, the inotropic effect of levosimendan was demonstrated to be mediated mainly through calcium sensitization in the isolated heart as well as the papillary muscle preparations at clinically relevant concentrations. In the isolated Lagendorff-perfused heart, glibenclamide antagonized the levosimendan-induced increase in coronary flow (CF). Therefore, the main vasodilatory mechanism in coronary veins is believed to be the opening of the ATP-sensitive potassium (KATP) channels. In the paced hearts, CF did not increase in parallel with oxygen consumption (MVO2), thus indicating that levosimendan had a direct vasodilatory effect on coronary veins. The pharmacology of levosimendan was clearly different from that of milrinone, which induced an increase in CF in parallel with MVO2. In conclusion, levosimendan was demonstrated to increase cardiac contractility by binding to cardiac troponin C and sensitizing the myofilament contractile proteins to calcium, and further to induce coronary vasodilatation by opening KATP channels in vascular smooth muscle. In addition, the efficiency of the cardiac contraction was shown to be more advantageous when the heart was perfused with levosimendan in comparison to milrinone perfusion.

Cathepsin D Deficiency - Molecular and Cellular Mechanisms of Neurodegeneration

Cathepsin D (CTSD) is a lysosomal protease, the deficiency of which is fatal and associated with neurodegeneration. CTSD knock-out mice, which die at the age of four weeks, show intestinal necrosis, loss of lymphoid cells and moderate pathological changes in the brain. An active-site mutation in the CTSD gene underlies a neurodegenerative disease in newborn sheep, characterized by brain atrophy without any changes to visceral tissues. The CTSD deficiences belong to the group of neuronal ceroid-lipofuscinoses (NCLs), severe neurodegenerative lysosomal storage disorders. The aim of this thesis was to examine the molecular and cellular mechanisms behind neurodegeneration in CTSD deficiency. We found the developmental expression pattern of CTSD to resemble that of synaptophysin and the increasing expression of CTSD to coincide with the active period of myelination in the rat brain, suggesting a role for CTSD in early rat brain development. An active-site mutation underlying the congenital ovine NCL not only affected enzymatic activity, but also changed the stability, processing and transport of the mutant protein, possibly contributing to the disease pathogenesis. We also provide CTSD deficiency as a first molecular explanation for human congenital NCL, a lysosomal storage disorder, characterized by neuronal loss and demyelination in the central nervous system. Finally, we show the first evidence for synaptic abnormalities and thalamocortical changes in CTSD-deficient mice at the molecular and ultrastructural levels. Keywords: cathepsin D, congenital, cortex, lysosomal storage disorder, lysosome, mutation, neurodegeneration, neuronal ceroid-lipofuscinosis, overexpression, synapse, thalamus

Cellular and network mechanisms generating spontaneous population events in the immature rat hippocampus

Distinct endogenous network events, generated independently of sensory input, are a general feature of various structures of the immature central nervous system. In the immature hippocampus, these type of events are seen as "giant depolarizing potentials" (GDPs) in intracellular recordings in vitro. GABA, the major inhibitory neurotransmitter of the adult brain, has a depolarizing action in immature neurons, and GDPs have been proposed to be driven by GABAergic transmission. Moreover, GDPs have been thought to reflect an early pattern that disappears during development in parallel with the maturation of hyperpolarizing GABAergic inhibition. However, the adult hippocampus in vivo also generates endogenous network events known as sharp (positive) waves (SPWs), which reflect synchronous discharges of CA3 pyramidal neurons and are thought to be involved in cognitive functions. In this thesis, mechanisms of GDP generation were studied with intra- and extracellular recordings in the neonatal rat hippocampus in vitro and in vivo. Immature CA3 pyramidal neurons were found to generate intrinsic bursts of spikes and to act as cellular pacemakers for GDP activity whereas depolarizing GABAergic signalling was found to have a temporally non-patterned facilitatory role in the generation of the network events. Furthermore, the data indicate that the intrinsic bursts of neonatal CA3 pyramidal neurons and, consequently, GDPs are driven by a persistent Na+ current and terminated by a slow Ca2+-dependent K+ current. Gramicidin-perforated patch recordings showed that the depolarizing driving force for GABAA receptor-mediated actions is provided by Cl- uptake via the Na-K-C1 cotransporter, NKCC1, in the immature CA3 pyramids. A specific blocker of NKCC1, bumetanide, inhibited SPWs and GDPs in the neonatal rat hippocampus in vivo and in vitro, respectively. Finally, pharmacological blockade of the GABA transporter-1 prolonged the decay of the large GDP-associated GABA transients but not of single postsynaptic GABAA receptor-mediated currents. As a whole the data in this thesis indicate that the mechanism of GDP generation, based on the interconnected network of bursting CA3 pyramidal neurons, is similar to that involved in adult SPW activity. Hence, GDPs do not reflect a network pattern that disappears during development but they are the in vitro counterpart of neonatal SPWs.

The Mechanisms of Hedgehog Signal Transduction

Studies in both vertebrates and invertebrates have identified proteins of the Hedgehog (Hh) family of secreted signaling molecules as key organizers of tissue patterning. Initially discovered in Drosophila in 1992, Hh family members have been discovered in animals with body plans as diverse as those of mammals, insects and echinoderms. In humans three related Hh genes have been identified: Sonic, Indian and Desert hedgehog (Shh, Ihh and Dhh). Transduction of the Hh signal to the cytoplasm utilizes an unusual mechanism involving consecutive repressive interactions between Hh and its receptor components, Patched (Ptc) and Smoothened (Smo). Several cytoplasmic proteins involved in Hh signal transduction are known in Drosophila, but mammalian homologs are known only for the Cubitus interruptus (Ci) transcription factor (GLI(1-3)) and for the Ci/GLI-associated protein, Suppressor of Fused (Su(fu)). In this study I analyzed the mechanisms of how the Hh receptor Ptc regulates the signal transducer Smo, and how Smo relays the Shh signal from the cell surface to the cytoplasm ultimately leading to the activation of GLI transcription factors. In Drosophila, the kinesin-like protein Costal2 (Cos2) is required for suppression of Hh target gene expression in the absence of ligand, and loss of Cos2 causes embryonic lethality. Cos2 acts by bridging Smo to the Ci. Another protein, Su(Fu) exerts a weak suppressive influence on Ci activity and loss of Su(Fu) causes subtle changes in Drosophila wing pattern. This study revealed that domains in Smo that are critical for Cos2 binding in Drosophila are dispensable for mammalian Smo function. Furthermore, by analyzing the function of Su(Fu) and the closest mouse homologs of Cos2 by protein overexpression and RNA interference I found that inhibition of the Hh response pathway in the absence of ligand does not require Cos2 activity, but instead critically depends on the activity of Su(Fu). These results indicate that a major change in the mechanism of action of a conserved signaling pathway occurred during evolution, probably through phenotypic drift made possible by the existence in some species of two parallel pathways acting between the Hh receptor and the Ci/GLI transcription factors. In a second approach to unravel Hh signaling we cloned > 90% of all human full-length protein kinase cDNAs and constructed the corresponding kinase-activity deficient mutants. Using this kinome resource as a screening tool, two kinases, MAP3K10 and DYRK2 were found to regulate Shh signaling. DYRK2 directly phosphorylated and induced the proteasome dependent degradation of the key Hh-pathway regulated transcription factor, GLI2. MAP3K10, in turn, affected GLI2 indirectly by modulating the activity of DYRK2.