Board legal expertise, shareholder activism, and corporate governance.

摘要

Existing studies on corporate governance mostly focus on board conflicts of interest and bias problems and often use board composition as the proxy for such characteristic of the board. We look at two important dimensions of corporate governance that are largely overlooked in the literature: board legal expertise and shareholder activism. This study consists of three essays and constitutes an empirical investigation of (a) how board legal expertise affect disclosure policy, (b) how board legal expertise impacts the cost of capital and what are the determinants of board legal expertise, and (c) how hedge fund activism affect bondholder value.;The first paper asks the question of whether board legal expertise affects disclosure policy. Firms have different levels of disclosure, due to the different competitive environments they face and the different degrees of agency conflicts between managers and outside investors. Even within mandatory disclosures, ample discretions are allowed on how to implement it. The board of directors, which is involved in advising and monitoring the mangers, has a role in the disclosure policy decision-making process. Board members come to the board with different backgrounds and different sets of expertise. One type of expertise that is especially pertinent to legal---sensitive disclosure policy is legal expertise, which has been much emphasized by Firms in their board appointment announcements.;Since information withholding and misrepresentation are associated with considerable legal risk, directors with legal expertise, who understand legal liabilities and the public effects of corporate behaviors better than others, should be associated with less information withholding or misrepresentation, leading to higher information quality. We look at two measures of disclosure policy: accounting conservatism and discretionary accruals quality. Using a sample of Russell 1000 industrial firms in 2003 and 2005, we find that board legal expertise is associated with greater accounting conservatism and higher discretionary accruals quality.;The second paper explores the determinants of board legal expertise by mainly looking at the factors that may affect firm disclosure. I find that larger firms and firms with higher leverage tend to have greater percentage of the boards represented by directors with legal expertise. Firms with greater board independence tend to have more directors with legal expertise, implying that board legal expertise may be a complement for board independence in reducing information withholding and manipulation problems. Technology firms and firms with high volatility tend to have fewer directors with legal expertise. I further explore the role of board legal expertise in improving information environment by examining the relation between board legal expertise and the firm's cost of capital. Using a sample of Russell 1000 industrial firms in 2003, I find that legal expertise on the board is negatively related to the cost of capital.;The third paper examines the impact of hedge fund activism on bondholder value. Hedge fund activism targets a wide array of problems related to the firm's governance, business strategies, and operations. Aggressive hedge fund activism may even urges to sell the firm, in order to "unlock shareholder value". Credit rating companies like Fitch has warned that shareholder activism has caused radical changes to the target firm's financial policies, to the potential detriment of creditors. We suggest that from a bondholder's point of view, there are benefits and costs associated with hedge fund activism. Hedge fund activism may benefit bondholders through better corporate governance and higher operational efficiency. However, hedge fund activism may harm bondholder value by increasing payout to shareholders or urging to spin-off some division or to sell the firm. We study the impact of hedge fund activism on bondholder value using a mean-adjusted model. Our results indicate that generally the bond market reacts negatively to hedge fund activism events. Hedge fund activism that urges to sell the firm is associated with more negative abnormal bond returns. Protective covenants may help to mitigate the negative effect of hedge fund activism on bondholder value.