Essays in Corporate Finance and Governance

Abstract

This dissertation is a collection of essays that investigate the intersection of managerial behaviors, corporate governance quality, and financial outcomes. Chapter 1 explores the relationship between chief executive compensation, financial performance, and corporate governance quality for large U.S. nonprofits – an organizational form that does not have owners. Strong corporate governance helps to establish reasonable levels of managerial pay and perquisite consumption, and to mitigate excessively high levels of executive compensation that tend to accompany poor organizational performance. These findings demonstrate the positive impact of good governance on managerial behaviors and corporate outcomes in a setting where monitoring mechanisms are inherently weak. Chapter 2 examines whether nonprofit hospitals use earnings management to enhance their charitable image. Nonprofit hospitals whose earnings deviate from a low profit benchmark shift costs from non-patient-centered to patient-centered activities to project the appearance that they are better fulfilling a charitable mission and patient-centered focus. This effect is magnified for hospitals with greater normative pressures, lower regulatory oversight, and greater reliance on external financing through donations. These findings highlight the importance of looking beyond bottom-line net income when assessing the quality of accounting earnings. Chapter 3 investigates the impact of corporate political connections on firm value and financial policies in the context of a landmark Supreme Court ruling, Citizens United v. Federal Election Commission (“Citizens United”). Historically politically connected firms realized an abnormal price drop of −0.475% on the date the Citizens United decision was announced, and a cumulative abnormal loss of −1.219% five days after the announcement date. In contrast, historically non-politically connected firms enjoyed positive returns on announcement date on the order of 0.240%. Additionally, the corporate cash holdings of historically politically connected firms increase in response to the Citizens United decision, particularly when corporate governance is weak. These findings support a link between agency costs and political connections.