Essays on regulatory interventions in corporate governance reforms

Abstract

This dissertation investigates the role of regulators in direct corporate governance interventions. Opponents of these interventions argue that regulators possess neither the expertise nor sufficient information to undertake corporate governance reforms. Moreover, regulators aim to achieve financial stability and compliance, which differs from the profit maximization goal of firm shareholders. In the essays that form this dissertation, I exploit two rare opportunities to study the direct regulatory intervention in corporate governance. Chapter 1 contains an empirical investigation of the European Central Bank’s fit and proper assessments on the boards of directors and top executives hired by large banks in the Eurozone. I find that, after the introduction of the fit and proper assessments, the board characteristics of the supervised banks conform to the Central Bank’s preferred criteria. Moreover, these movements are associated with lower shareholder returns subsequent to the board turnover announcement. In Chapter 2, I study a prosecution policy known as the “non-prosecution or deferred prosecution agreement,” which was first implemented in the United States following the collapse of accounting firm Arthur Andersen in 2002. My key finding is that the market has more negative returns around the filings of corporate governance changes made through the Securities and Exchange Commission among firms under a cooperation agreement during the intervention period than firms under traditional settlements. These firms put more emphasis on the monitoring function of the board, such as through establishing new committees and repealing CEO duality. Further tests show that future financial reporting quality is not improved and future stock market performance is worse, partially explaining the negative reactions to the corporate governance changes. Collectively, the evidence suggests that regulators play a key role in direct corporate governance reforms. By examining this emergent phenomenon, which is of increasing economic and social significance, I seek to contribute to the literature on corporate governance interventions.