Three essays on the interrelationships among financial restatements, corporate governance, market microstructure and the firm's rate of return

The increase in the number of financial restatements in recent years has resulted in a significant decrease in the amount of market capitalization for restated companies. Prior literature did not differentiate between single and multiple restatements announcements. This research investigated the inter-relationships among multiple financial restatements, corporate governance, market microstructure and the firm’s rate of return in the form of three essays by differentiating between single and multiple restatement announcement companies. First essay examined the stock performance of companies announcing the financial restatement multiple times. The postulation is that prior research overestimates the abnormal return by not separating single restatement companies from multiple restatement companies. This study investigated how market penalizes the companies that announce restatement more than once. Differentiating the restatement announcement data based on number of restatement announcements, the results supported the non persistence hypothesis that the market has no memory and negative abnormal returns obtained after each of the restatement announcements are completely random. Second essay examined the multiple restatement announcements and its perceived resultant information asymmetry around the announcement day. This study examined the pattern of information asymmetry for these announcements in terms of whether the bid-ask spread widens around the announcement day. The empirical analysis supported the hypotheses that the spread does widen not only around the first restatement announcement day but around every subsequent announcement days as well. The third essay empirically examined the financial and corporate governance characteristics of single and multiple restatement announcements companies. The analysis showed that corporate governance variables influence the occurrence of multiple restatement announcements and can distinguish multiple restatements announcement companies from single restatement announcement companies.

Three essays on corporate governance and meeting-beating or missing analyst forecasts

The beginning of the 21st century was plagued with unprecedented instances of corporate fraud. In an attempt to address apparent non-existent or “broken” corporate governance policies, sweeping measures of financial reporting reform ensued, having specific requirements relating to the composition of audit committees, the interaction between audit committees and external auditors, and procedures concerning auditors’ assessment of client risk. The purpose of my dissertation is to advance knowledge about “good” corporate governance by examining the association between meeting-or-beating analyst forecasts and audit fees, audit committee compensation, and audit committee tenure and “busyness”. Using regression analysis, I found the following: (1) the frequency of meeting-or-just beating (just missing) analyst forecasts is negatively (positively) associated with audit fees, (2) the extent by which a firm exceeds analysts’ forecasts is positively (negatively) associated with audit committee compensation that is predominately equity-based (cash-based), and (3) the likelihood of repeatedly meeting-or-just beating analyst forecasts is positively associated with audit committee tenure and “busyness”. These results suggest that auditors consider clients who frequently meet-or-just beat forecasts as being less “risky”, and clients that frequently just miss as being more “risky”. The results also imply that cash-based director compensation is more successful in preserving the effectiveness of the audit committee’s financial reporting oversight role, that equity-based compensation motivates independent audit committee directors to focus on short-term performance thereby aligning their interests with management, and that audit committee director tenure and the degree of director “busyness” can affect an audit committee member’s effectiveness in providing financial reporting oversight. Collectively, my dissertation provides additional insights regarding corporate governance practices and informs policy-makers for future relevant decisions.^

Three Essays on the Interrelationships Among Financial Restatements, Corporate Governance, Market Microstructure and the Firm's Rate of Return

The increase in the number of financial restatements in recent years has resulted in a significant decrease in the amount of market capitalization for restated companies. Prior literature does not differentiate between single and multiple restatements announcements. This research investigates the inter-relationships among multiple financial restatements, corporate governance, market microstructure and the firm's rate of return in the form of three essays by differentiating between single and multiple restatement announcement companies. First essay examines the stock performance of companies announcing the financial restatement multiple times. The postulation is that prior research overestimates the abnormal return by not separating single restatement companies from multiple restatement companies. This study investigates how market penalizes the companies that announce restatement more than once. Differentiating the restatement announcement data based on number of restatement announcements, the results support for non persistence hypothesis that the market has no memory and negative abnormal returns obtained after each of the restatement announcements are completely random. Second essay examines the multiple restatement announcements and its perceived resultant information asymmetry around the announcement day. This study examines the pattern of information asymmetry for these announcements in terms of whether the bid-ask spread widens around the announcement day. The empirical analysis supports the hypotheses that the spread does widen not only around the first restatement announcement day but around every subsequent announcement days as well. The third essay empirically examines the financial and corporate governance characteristics of single and multiple restatement announcements companies. The analysis shows that corporate governance variables influence the occurrence of multiple restatement announcements and can distinguish multiple restatements announcement companies from single restatement announcement companies.

Essays on corporate reputation: Antecedents and consequences

This dissertation studied the determinants and consequences of corporate reputation. It explored how firm-, industry-, and country-level factors influence the general public’s assessment of a firm’s reputation and how this reputation assessment impacted the firm’s strategic actions and organizational outcomes. The three empirical essays are grounded on separate theoretical paradigms in strategy, organizational theory, and corporate governance. The first essay used signaling theory to investigate firm-, industry-, and country-level determinants of individual-level corporate reputation assessments. Using a hierarchical linear model, it tested the theory based on individual evaluations of the largest companies across countries. Results indicated that variables at multiple analysis levels simultaneously impact individual level reputation assessments. Interactions were also found between industry- and country-level factors. Results confirmed the multi-level nature of signaling influences on reputation assessments. Building on a stakeholder-power approach to corporate governance, the second essay studied how differences in the power and preferences of three stakeholder groups—shareholders, creditors, and workers—across countries influence the general public’s reputation assessments of corporations. Examining the largest companies across countries, the study found that while the influence of stock market return is stronger in societies where shareholders have more power, social performance has a more significant role in shaping reputation evaluations in societies with stronger labor rights. Unexpectedly, when creditors have greater power, the influence of financial stability on reputation assessment becomes weaker. Exploring the consequences of reputation, the third essay investigated the specific effects of intangible assets on strategic actions and organizational outcomes. Particularly, it individually studied the impacts of acquirer acquisition experience, corporate reputation, and approach toward social responsibilities as well as their combined effect on market reactions to acquisition announcements. Using an event study of acquisition announcements, it confirmed the significant impacts of both action-specific (acquisition experience) and general (reputation and social performance) intangible assets on market expectations of acquisition outcomes. Moreover, the analysis demonstrated that reputation magnifies the impact of acquisition experience on market response to acquisition announcements. In conclusion, this dissertation tried to advance and extend the application of management and organizational theories by explaining the mechanisms underlying antecedents and consequences of corporate reputation.

What does board capital really bring to the table? Exploring the effect of directors' human and social capital on effective governance during international expansion

What constitutes effective corporate governance? Which director characteristics render boards effective at positively influencing firm-level performance outcomes? This dissertation examines these questions by taking a multilevel, multidisciplinary approach to corporate governance. I explore the individual-, team-, and firm- level factors that enable directors to serve effectively as strategic resources during international expansion. I argue that directors' international experience improves their ability to serve as effective strategic consultants and resource providers to firms during the complex internationalization process. However, unlike prior research, which tends to assume that directors with the potential to provide important resources uniformly do so, I acknowledge contextual factors (i.e. board cohesiveness, strategic relevance of directors' experience) that affect their propensity to actually influence outcomes. I explore these issues in three essays: one review essay and two empirical essays.^ In the first empirical essay, I integrate resource dependence theory with insights from social-psychological research to explore the influence of board capital on firms' cross-border M&A performance. Using a sample of cross-border M&As completed by S&P 500 firms from 2004-2009, I find evidence that directors' depth of international experience is associated with superior pre-deal outcomes. This suggests that boards' deep, market-specific knowledge is valuable during the target selection phase. I further find that directors' breadth of international experience is associated with superior post-deal performance, suggesting that these directors' global mindset helps firms in the post-M&A integration phase. I also find that these relationships are positively moderated by board cohesiveness, measured by boards' internal social ties.^ In the second empirical essay, I explore the boundary conditions of international board capital by examining how the characteristics of firms' internationalization strategy moderate the relationship between board capital and firm performance. Using a panel of 377 S&P 500 firms observed from 2004-2011, I find that boards' depth of international experience and social capital are more important during early stages of internationalization, when firms tend to lack market knowledge and legitimacy in the host markets. On the other hand, I find that breadth of international experience has a stronger relationship with performance when firms' have higher scope of internationalization, when information-processing demands are higher.^

What Does Board Capital Really Bring to the Table? Exploring the Effect of Directors’ Human and Social Capital on Effective Governance During International Expansion

What constitutes effective corporate governance? Which director characteristics render boards effective at positively influencing firm-level performance outcomes? This dissertation examines these questions by taking a multilevel, multidisciplinary approach to corporate governance. I explore the individual-, team-, and firm- level factors that enable directors to serve effectively as strategic resources during international expansion. I argue that directors’ international experience improves their ability to serve as effective strategic consultants and resource providers to firms during the complex internationalization process. However, unlike prior research, which tends to assume that directors with the potential to provide important resources uniformly do so, I acknowledge contextual factors (i.e. board cohesiveness, strategic relevance of directors’ experience) that affect their propensity to actually influence outcomes. I explore these issues in three essays: one review essay and two empirical essays. In the first empirical essay, I integrate resource dependence theory with insights from social-psychological research to explore the influence of board capital on firms’ cross-border M&A performance. Using a sample of cross-border M&As completed by S&P 500 firms from 2004-2009, I find evidence that directors’ depth of international experience is associated with superior pre-deal outcomes. This suggests that boards’ deep, market-specific knowledge is valuable during the target selection phase. I further find that directors’ breadth of international experience is associated with superior post-deal performance, suggesting that these directors’ global mindset helps firms in the post-M&A integration phase. I also find that these relationships are positively moderated by board cohesiveness, measured by boards’ internal social ties. In the second empirical essay, I explore the boundary conditions of international board capital by examining how the characteristics of firms’ internationalization strategy moderate the relationship between board capital and firm performance. Using a panel of 377 S&P 500 firms observed from 2004-2011, I find that boards’ depth of international experience and social capital are more important during early stages of internationalization, when firms tend to lack market knowledge and legitimacy in the host markets. On the other hand, I find that breadth of international experience has a stronger relationship with performance when firms’ have higher scope of internationalization, when information-processing demands are higher.

Liquidity, Governance and Adverse Selection in Asset Pricing

A plethora of recent literature on asset pricing provides plenty of empirical evidence on the importance of liquidity, governance and adverse selection of equity on pricing of assets together with more traditional factors such as market beta and the Fama-French factors. However, literature has usually stressed that these factors are priced individually. In this dissertation we argue that these factors may be related to each other, hence not only individual but also joint tests of their significance is called for. In the three related essays, we examine the liquidity premium in the context of the finer three-digit SIC industry classification, joint importance of liquidity and governance factors as well as governance and adverse selection. Recent studies by Core, Guay and Rusticus (2006) and Ben-Rephael, Kadan and Wohl (2010) find that governance and liquidity premiums are dwindling in the last few years. One reason could be that liquidity is very unevenly distributed across industries. This could affect the interpretation of prior liquidity studies. Thus, in the first chapter we analyze the relation of industry clustering and liquidity risk following a finer industry classification suggested by Johnson, Moorman and Sorescu (2009). In the second chapter, we examine the dwindling influence of the governance factor if taken simultaneously with liquidity. We argue that this happens since governance characteristics are potentially a proxy for information asymmetry that may be better captured by market liquidity of a company’s shares. Hence, we jointly examine both the factors, namely, governance and liquidity – in a series of standard asset pricing tests. Our results reconfirm the importance of governance and liquidity in explaining stock returns thus independently corroborating the findings of Amihud (2002) and Gompers, Ishii and Metrick (2003). Moreover, governance is not subsumed by liquidity. Lastly, we analyze the relation of governance and adverse selection, and again corroborate previous findings of a priced governance factor. Furthermore, we ascertain the importance of microstructure measures in asset pricing by employing Huang and Stoll’s (1997) method to extract an adverse selection variable and finding evidence for its explanatory power in four-factor regressions.

Audit committee director turnover

Actions by both private sector organizations and legislators in recent years have highlighted the importance of the audit committee of the board of directors of corporations in the financial reporting process. For example, the Sarbanes Oxley Act of 2002 has multiple sections that deal with the composition and functioning of audit committees. My dissertation examines multiple issues related to the composition of audit committees. In the first two parts of my dissertation, I examine the stock market reactions to disclosures of audit committee appointments and departures in the 8-Ks filed with the SEC during 2008 and 2009. I find that there is a positive stock market reaction to the appointment of audit committee directors who are financial experts. The second essay investigates the cumulative abnormal return to departure of audit committee directors. I find that when an accounting expert leaves the audit committee, the market reaction is significantly negative. These results are consistent with regulators’ concerns related to having directors with audit, accounting and other financial expertise on corporate audit committees. The third essay of my dissertation examines the changes in audit committee composition in the last decade. I find that while the increase in audit committee size is relatively modest, there has been a significant increase in the number of audit committee experts and the frequency of audit committee meetings over the past decade; interestingly, such increase in the number of meetings has persisted even after the media focus on the auditing profession, in the immediate aftermath of the Enron and Andersen failures, have waned. My results show that audit committee composition and its role continues to evolve with regulatory and other corporate governance related changes.

Brazil Under Dilma Rousseff: Similar Policy Directions Maintained.

It is unlikely that the newly elected government of Dilma Rousseff will make any fundamental changes to the major imperatives that underlie Brazilian policy: that is, macroeconomic stability and poverty alleviation. These policy imperatives have set the country on the road to good governance and have provided former presidents a chance to claim continuity. While President Rousseff of the Worker’s Party (PT) may have a distinct style, personality, and set of leadership skills compared to her predecessors, she is expected to maintain the core macroeconomic stability and social policies that are currently in place. Many who expected Rousseff to be former president Luiz Inácio “Lula” da Silva’s carbon copy are discovering that from day one she has showcased a different governing style than her mentor. She has emphasized her commanding authority and has brought about fresh approaches to delicate matters, which entail domestic economic issues and foreign policy. For example, her administration has aggressively applied a set of macro-prudential measures to counter inflationary pressures on the Brazilian currency (Real). And in foreign policy, she has steadfastly recalibrated Itamarity’s stance on the controversial issues, such as Iran, and now appears to have refocused its short-term efforts on cementing Brazil’s leadership role in the region’s southern cone.

Interdependencies in corporate development: Relationship between strategic alliance and acquisition activities

A substantial amount of work in the field of strategic management has attempted to explain the antecedents and outcomes of organizational learning. Though multinational corporations simultaneously engage in various types of tasks, activities, and strategies on a regular basis, the transfer of organizational learning in a multi-task context has largely remained under-explored in the literature. To inform our understanding in this area, this dissertation aimed at synthesizing findings from two parallel research streams of corporate development activities: strategic alliances and acquisitions. Structured in the form of two empirical studies, this dissertation examines: 1) the strategic outcomes of alliance experience of previously allying partners in terms of subsequent acquisition attempts, and 2) the performance implications of prior alliance experience for acquisitions. The first study draws on the relational view of inter-organizational governance to explain how various deal-specific and dyadic characteristics of a partnership relate to partnering firms' post-alliance acquisition attempts. This model theorizes on a variety of relational mechanisms to build a cohesive theory of inter-organizational exchanges in a multi-task setting where strategic alliances ultimately lead to a firm's decision to commit further resources. The second study applies organizational learning theory, and specifically examines whether frequency, recency, and relatedness of different dimensions of prior alliances, beyond the dyad-level experience, relate to an acquirer's superior post-acquisition performance. The hypotheses of the studies are tested using logistic and ordinary least square regressions, respectively. Results analyzed from a sample of cross-border alliance and acquisition deals attempted (for study I) and/or completed (for study II) during the period of 1991 to 2011 generally support the theory that relational exchange determines acquiring firms' post alliance acquisition behavior and that organizational routines and learning from prior alliances influence a future acquirer's financial performance. Overall, the empirical findings support our overarching theory of interdependency, and confirm the transfer effect of learning across these alternate, yet related corporate strategies of alliance and acquisition.^

Interdependencies in Corporate Development: Relationship between Strategic Alliance and Acquisition Activities

A substantial amount of work in the field of strategic management has attempted to explain the antecedents and outcomes of organizational learning. Though multinational corporations simultaneously engage in various types of tasks, activities, and strategies on a regular basis, the transfer of organizational learning in a multi-task context has largely remained under-explored in the literature. To inform our understanding in this area, this dissertation aimed at synthesizing findings from two parallel research streams of corporate development activities: strategic alliances and acquisitions. Structured in the form of two empirical studies, this dissertation examines: 1) the strategic outcomes of alliance experience of previously allying partners in terms of subsequent acquisition attempts, and 2) the performance implications of prior alliance experience for acquisitions. The first study draws on the relational view of inter-organizational governance to explain how various deal-specific and dyadic characteristics of a partnership relate to partnering firms’ post-alliance acquisition attempts. This model theorizes on a variety of relational mechanisms to build a cohesive theory of inter-organizational exchanges in a multi-task setting where strategic alliances ultimately lead to a firm’s decision to commit further resources. The second study applies organizational learning theory, and specifically examines whether frequency, recency, and relatedness of different dimensions of prior alliances, beyond the dyad-level experience, relate to an acquirer’s superior post-acquisition performance. The hypotheses of the studies are tested using logistic and ordinary least square regressions, respectively. Results analyzed from a sample of cross-border alliance and acquisition deals attempted (for study I) and/or completed (for study II) during the period of 1991 to 2011 generally support the theory that relational exchange determines acquiring firms’ post alliance acquisition behavior and that organizational routines and learning from prior alliances influence a future acquirer’s financial performance. Overall, the empirical findings support our overarching theory of interdependency, and confirm the transfer effect of learning across these alternate, yet related corporate strategies of alliance and acquisition.