Essays In Corporate Policy

This dissertation includes three chapters on corporate policy in workplace safety and health. The research seeks to understand three economic determinants of workplace safety and health hedge fund activism, shareholder litigation, and product market competition.Chapter 1 examines the impact of hedge fund activism on employee safety and health. Using a difference-in-differences framework to analyze regulatory safety records data, we find that the workplace incident rate rises after a company is targeted by an activist hedge fund. We also find that target firms reduce workplace safety-related investment, increase worker strain, and reduce management safety emphasis. Overall, the results imply that hedge fund activism induces managerial short-termism with respect to workplace safety. Chapter 2 studies the impact of shareholder litigation risk on workplace safety and health. Using the staggered state adoption of Universal Demand law that lowers shareholder derivative litigation risk to workplace safety, we find that weakened shareholder litigation rights compromise workplace safety. The impact is more pronounced for firms with weak governance, in less competitive, low union coverage, or low skilled industries. Overall, our findings suggest that shareholder litigation incentivizes corporate officials to uphold workplace safety. Chapter 3 examines the impact of product market competition on operational risk management. Using import penetration as exogenous variations for competition with regulatory safety records data, I find that increased import competition reduces workplace incident rate. Import competition also reduces safety violations and right tail risks of severe safety accidents. Overall, these findings suggest an operational channel via which firms manage competition risks.

These essays explore the connection between the structure of information and corporate policies. The first essay, "Firm Performance Pay as Insurance for Workers," studies a setting in which non-executive workers compete against each other for promotions into higher level positions. I show that when workers prefer early resolution of uncertainty, information about firm output generates promotion risk, against which firm performance pay insures. The second essay, "Fighting Fire with Fire: Mitigating Information Asymmetry with Open-Market Repurchase Program," analyzes the effects of open-market repurchase programs on liquidity. I find that in the presence of other informed traders, share repurchases generate two competing effects on liquidity trading costs. I provide conditions under which repurchase programs mitigate the adverse selection problem, rather than exacerbate it.

This dissertation consists of three essays on the legal environment, corporate policy and corporate governance. The dissertation research seeks to contribute to a new understanding of the relationship between the legal environment, corporate behavior and corporate governance. In the first essay, we use a unique hand-collected dataset on corporate subsidiaries and lawsuits to examine the relationship between litigation risk and subsidiary usage by large U.S. corporations. We find that firms, in general, tend to have a large number of subsidiaries when exposed to high litigation risk. Dividing the sample into financially distressed and financially healthy sub-samples, we find that financially distressed firms tend to have a large number of subsidiaries when exposed to high litigation risk, while this tendency is less pronounced in financially healthy firms. High severity litigation risk matters more than low severity litigation risk. The results are consistent with the prediction of theoretical models. Taken together, they bring to light an efficient link between litigation risk and subsidiary usage. The second essay empirically examines the relationship between litigation risk and key financial and investment policy choices. We use a unique hand-collected database on corporate lawsuits as a proxy to measure litigation risk. The key financial and investment policies we investigate include: the levels of financial leverage, cash holdings, and capital expenditures. After controlling for other determinants of corporate financial and investment policies, we find a negative relationship between litigation risk and financial leverage. We also find a positive relationship between the level of cash holdings and securities and intellectual property litigation. In addition, we document a negative relationship between the level of cash holdings and high severity litigation risk in general, and government contracts, corporate governance, and employment and labor litigation, in particular. Furthermore, we find a positive relationship between litigation risk and the level of capital expenditures. Partitioning the sample into unified and parent-subsidiary firms, we find that relative to high litigation risk firms with a unified corporate structure, high litigation risk firms with parent-subsidiary structures have significantly higher levels of financial leverage and cash holdings, and lower level of capital expenditures. Thus, corporate organizational form appears to be a clear substitute for financial policy in responding to litigation risk. Taken together, these results highlight a link between litigation risk and corporate financial and investment policy choices. In Essay three, we examine the effects of board structure on corporate litigation. Using a unique hand-collected dataset on corporate lawsuits and the 2002 NYSE/NASDAQ exchange listing requirements on board independence as an exogenous shock, with the difference-in-difference methodology, we empirically examine how an increase in the percentage of independent directors on boards affects a wide variety of corporate litigation. We find that an exogenous increase in the percentage of independent directors on a board is associated with a significant decrease in corporate litigation. In addition, the results are stronger in industries where the exposure to the various types of corporate litigation is greater. These findings provide evidence of the effective monitoring role of independent directors.

This dissertation consists of two essays on corporate policy. The first chapter analyzes whether being labeled a "growth" firm or a "value" firm affects the firms dividend policy. I focus on the dividend policy because of its discretionary nature and the link to investor demand. To address endogeneity concerns, I use regression discontinuity design around the threshold to assign firms to each category. The results show that "value" firms have a significantly higher dividend payout - about four percentage points - than growth firms. This approach establishes a causal link between firm "growth/value" labels and dividend policy. The second chapter develops investment policy model which associated with duration of cash flow. Firms are doing their business by operating a portfolio of projects that have various duration, and the duration of the project portfolio generates different duration of cash flow stream. By assuming the duration of cash flow as a firm specific characteristic, this paper analyzes how the duration of cash flow affects firms investment decision. I develop a model of investment, external finance, and savings to characterize how firms decision is affected by the duration of cash flow. Firms maximize total value of cash flow, while they have to maintain their solvency by paying a fixed cost for the operation. I empirically confirm the positive correlation between duration of cash flow and investment with theoretical support. Financial constraint suffocates the firm when they face solvency issue, so that model with financial constraint shows that the correlation between duration of cash flow and investment is stronger than low financial constraint case.