Three Essays On The Agency Problem

This dissertation explores three types of agency related issues. The first essay is related to the CEO-shareholder relation. We examine how the legal background of affects the corporate policy and shareholder wealth. We empirically analyze whether law CEOs manage their firm differently. We find that law CEOs take less risk and perform better in the short-run. Law CEOs are especially valuable to firms involved in litigation. Specifically, when firms experience litigation, those with law CEOs experience less volatile market returns, maintain better operating performance and face lower litigation settlement costs. However, our evidence also suggests law CEOs tend to be more myopic. Firms with law CEOs invest less in R & D and have lower R & D growth rates. The second essay examine the relationship between acquirers and M & A advisors. Using a sample of serial takeover sequences, we examine the cost-benefit tradeoffs associated with an acquirer willingness of selecting suitable advisors for each deal during a sequence of acquisitions. We find that acquirers are willing to do so experience more favorable announcement reactions from shareholders, pay lower acquisition premiums and advisory fees, and complete transactions faster. We also use propensity score matching to address possible endogeneity concerns and find our results are robust. These findings suggest that acquirers benefit from selecting the right advisor for each acquisition rather than staying with one advisor throughout the sequence of acquisitions. The third essay focus on buyer-agent relationship. This essay studies the role of buyer brokers in the home-buying process under different market conditions by examining the effects of brokerage representation on home prices and search duration. Using data from 2006 and 2012 NAR annual surveys, we find that buyer brokers have no effect on prices in a seller market while they do have a statistically significant positive effect in a buyer market. We find that buyer brokers do not affect search duration in either a buyer or seller market. To address the endogeneity problem, we use the propensity score matching methodology, which find our results are robust. We also find that Internet search frequency has a significant effect on purchases prices and search duration.

Do financial derivatives enhance or impede innovation? We aim to answer this question by examining the relationship between equity options markets and standard measures of firm innovation. Our baseline results show that firms with more options trading activity generate more patents and patent citations per dollar of R&D invested. We then investigate how more active options markets affect firms' innovation strategy. Our results suggest that firms with greater trading activity pursue a more creative, diverse and risky innovation strategy. We discuss potential underlying mechanisms and show that options appear to mitigate managerial career concerns that would induce managers to take actions that boost short-term performance measures. Finally, using several econometric specifications that try to account for the potential endogeneity of options trading, we argue that the positive effect of options trading on firm innovation is causal.