Essays in financial economics and law
Afonso, Esteban Luis
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This dissertation considers topics in the intersection of law and economics and financial economics. The common theme running through each chapter is the problem of conflicts of interest that arise when a principal hires an agent to act on his behalf, otherwise known as the principal-agent problem. Specifically, this dissertation deals with the principal-agent problems between state/national government and the citizen and between corporate managers and their shareholders. Chapter 2 focuses on the incentives of state lawmakers in enacting antitakeover legislation, the subsequent effect of state antitakeover laws on target firms in the market for corporate control, and ultimately, how this affects shareholders. Chapter 3 investigates how corporate charters and bylaws that allow a firm to "stagger" their board of directors affects managerial performance. Chapter 4 employs a methodology developed in the finance literature to differentiate between competing theories of economic regulation. Chapter 2 of the dissertation, entitled "State Poison Pill Endorsement Statutes and the Market for Corporate Control,' provides evidence that poison pill endorsement statutes and, to a lesser degree, other constituency statues harm shareholders. Exploiting the variation in such laws at the state level, I show that a firm incorporated in a state with either a poison pill endorsement or other constituency statute has a 1.3% lower expected likelihood of receiving a bid, a large difference considering the typical likelihood of receiving a bid is about 5%. I also show that, conditional on receiving a bid, the wealth effect around the bid announcement is 2% to 3% lower with a diminished likelihood that other bidders challenge the initial bid for firms incorporated in a state with a pill endorsements statute. This suggests that poison pill endorsement statutes lead to a less competitive market for corporate control. If Delaware's success in attracting firm charters is a result of its permissive stance towards managers in change of control situations, the results of this paper support the "race to the bottom" view in the literature. Chapter 3, entitled "Explaining the Staggered Board Discount,' argues that the documented discount on firms with staggered boards is not evidence that staggered boards destroy firm value. Instead, firms that are already discounted relative to industry peers choose to adopt a staggered board. I find that when the macroeconomic environment is weak, deeply discounted firms, especially those in industries undergoing extensive merger activity, are more likely to choose (or retain) staggered boards than other types of firms. I use three econometric techniques to control for the decision to have a staggered board and find that the staggered board discount suggested by OLS regressions drops, and in some cases, even becomes a small premium. Staggered boards do not necessarily cause a loss of firm value after adoption but rather, are a symptom of other underlying factors that cause the market to impute a discount to the firm. Chapter 4, entitled "Cap and Trade and the Capture Theory of Regulation,' examines the effect of carbon dioxide regulation on the stock price of U.S. firms. This paper looks to overcome what is considered the most significant obstacle in using such methodology to study regulation, timing when market expectations change, by taking advantage of a surprise announcement by President George W. Bush in 2001 that conveyed a sudden reversal in his position towards such regulation. Event studies on the day of this announcement find that industries that are highly "energy-intensive" experience statistically significant stock price reductions between 2 and 7 percent after controlling for marketwide variation. Most other industries display insignificant abnormal returns. These results support the capture theory of regulation.