Three Essays on the Firm's Objective and Corporate Governance
Moskalev, Alexandr
2020
Abstract
In my dissertation, I scrutinize the notion of profit maximization being the objective of a firm. I explore the influence of widely diversified shareholders on corporate governance through voting at director elections. I proceed in three major steps. First, in a theoretical model I show that correlation in voting behavior is associated with the weights shareholders have in determination of firm's objective. Next, I provide empirical evidence that portfolio structure matters for voting decisions, and that voting decisions translate into noticeable effects on directors' career prospects. Finally, I discover that similar portfolios are associated with similar voting behavior, and that this result extends to groups of shareholders with a sizable impact on voting tallies in director elections. I derive the objective function of a firm with heterogeneous shareholders. In contrast to Fisher separation theorem, I drop the price-taking assumption. Therefore, shareholders have no unanimous preferences for profit maximization. I allow shareholders to act strategically by omitting the conditional sincerity assumption and by accounting for possible correlation in their votes. I derive the exact form of the objective function and provide the equilibrium existence conditions. The resulting objective function can be approximated by a weighted sum of shareholders portfolios' profit. Shareholder groups with positive within-group correlation carry greater weight. In the second chapter, I present an evidence that mutual fund's portfolio structure matters for its voting decisions, and that director elections, the most common type of corporate elections, have delayed consequences for nominees' career prospects. In an event study of funds' mergers, I find that a merger affects the acquiring mutual fund's voting behavior. I observe higher chances of future non-nomination for directors with lower shareholder support. This result resonates with the literature on shareholder dissent. I find that low shareholder support is also associated with a notable decrease in the length of director's tenure at a company. In the third chapter, I analyze the role of shareholders’ portfolio / ownership structure on voting participation in director elections. I find that portfolio composition matters for how mutual funds vote. Funds with more similar portfolios are more likely to cast identical votes. An increase in within-group similarity of mutual funds' portfolios leads to an increase in the number of broker "Non-Votes". Thus, highly diversified horizontal shareholding causes lower participation (``rational apathy’’) among other shareholders. This effect gives widely diversified cohorts of mutual funds, shareholders of the firm, a higher marginal influence at director elections than their plain share of ownership would suggest.Subjects
preference aggregation corporate governance firm's objective corporate elections and voting behavior portfolio structure profit maximization
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