Essays in Agency, Incentives and Contracting.

Abstract

This dissertation examines issues in agency, incentives and contracting. The first two essays examine the relation between managerial power and supplier value while the third essay examines the behavior of investors in religious funds and fund performance.

In Essay One, I find that supplier wealth is adversely affected around top management turnover events of customers. The negative wealth effect on suppliers is stronger with greater market power of customers. In contrast, suppliers’ market power has no own wealth effects. The results suggest that contractual incompleteness in a long-term product market relationship exposes suppliers to breach of implicit contracts by new management of customers, and this risk increases with market power of customers. I further find that suppliers have a lower industry-adjusted market-to-book ratio after a customer’s management turnover event relative to a control group matched by industry and asset size.

In Essay Two, I hypothesize and find strong evidence that stock payment in non-diversifying mergers negatively impacts the wealth of bidder suppliers, especially under circumstances where control loss of the bidder is most severe, such as when the target has institutional block-holders and the bidder do not. Furthermore, the retention likelihood of bidder suppliers is significantly reduced by 12.7% when the bidder has no block-holders to counter-balance the target’s control blocks under stock financing in non-diversifying mergers. Interestingly, I also find that stock payment to the target’s control blocks generate positive announcement returns to the bidder suppliers in diversifying mergers. Hence, stock payment to the target’s control blocks can have beneficial or detrimental wealth effect on the bidder suppliers, depending on whether they face direct replacement threats from the target suppliers.

In Essay Three, I find that investors in religious funds exhibit flat flow-to-performance sensitivity, as would be predicted by the doctrine of religious loyalty. Furthermore, church-sponsored funds experience positive fund flows when past return is negative. Religious funds significantly under-perform major market indices and the secular socially responsible funds, and their poor performance is related to their higher industry concentration. Lastly, I find no evidence that church’s sponsorship affects industry concentration of the fund and its performance.