Three Essays on Corporate Governance, Managerial Incentives, and Government Expenditures.

Abstract

The first essay proposes potential benefits from monitoring as important determinants of institutional block holding, where the measures for monitoring benefits are identified from the information asymmetry problem. Using U.S. data, I find that firms’ agency problems attract large institutional holdings for monitoring purpose, and provide evidence that the large institutions are indeed doing monitoring. The study thus contributes to the literature on investor activism, which is usually limited to studying the effect of an existing large investor. In the second essay, we use the introduction of the US 1996 Telecommunications Act as our empirical setting to examine the dynamics of the role of peer performance in managerial compensation. We adopt a difference-in-differences design using size- and performance matched manufacturing firms as the benchmarks. The results indicate that, relative to the benchmark firms, telecommunications firms strengthened the tie between managerial compensation and peer performance after the Act. The results suggest that relative performance evaluation became more valuable for telecommunication firms after the Act. The third essay analyzes the response of state spending to windfall revenues using tobacco settlements in the U.S. in the late 1990s as a natural experiment. The “flypaper effect” in the public finance literature refers to an empirical puzzle that an increase in lump-sum grants from the higher level government boosts spending of a lower level government more than an equivalent increase in private income. Most of the early work relies on policy variations in fiscal grants across jurisdictions over time, and is subject to price or policy endogeneity problem. This study overcomes these limitations by exploiting the tobacco settlements between the U.S. states and tobacco manufactures in the late 1990s as a natural experiment. We find that state direct spending increases by about $1 on average in response to one dollar increase in the settlement funds and by about 8 cents to one dollar increase in private income, strong evidence for the “flypaper effect”. Results suggest that states with the higher adult smoking rate or those with heavy reliance on the tobacco manufacturing industry for economic growth have lower spending propensity from the windfall revenue.