Use this URL to cite or link to this record in EThOS: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.658840
Title: Three essays on firm default risk, executive compensation and institutional investors
Author: Chen, Jie
Awarding Body: University of Bristol
Current Institution: University of Bristol
Date of Award: 2014
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Abstract:
The thesis is arranged as three topics. The first topic is a joint work with my supervisor Paula Hill. We compare diverse measures of default risk (including both academic models and credit ratings) before examining its relationship with stock returns. The second topic is a joint work with my supervisors Neslihan Ozkan and Paula Hill and we examine the relationship between firm default risk and executive compensation. The third topic is a sole authored work in which I provide more evidence that correlated overpayments of CEOs and directors are symptomatic of agency problems related to cronyism. Cronyism is a term used to describe a phenomenon in which directors do not protect the interests of shareholders and choose to collude with the CEO for private benefits (Brick et al., 2006). In the first essay, we find considerable variation in the mean probability of default across our academic models. The correlations between the measures of default risk are significant at a 1 % level and yet tend to be less than 50%. The rating-based measures of default risk (i.e. S&P's and Moody's ratings) are highly correlated with each other (0.962) but have a maximum correlation of 0.498 with the academic models. Moreover, we show that different assumptions can lead to divergent assessments of default risk even where default risk measures appear similar theoretically, such as those based on the theories of Black and Scholes (1973) and Merton (1974). Nonetheless, we find that the relationship between stock returns and diverse measures of default risk tends to be consistent. Default risk is a significant determinant of stock returns with a "hump backed" relationship, as predicted by Garlappi and Yan (20 11). This relationship holds even after controlling for very high default risk firms, which contrasts with the findings of Avramov et al. (2009) that the relationship between stock returns and default risk is driven by firms with low credit quality. Given the reasonable consistency in the observed relationship between stock returns and diverse measures of default risk, we find little evidence that differences in the conclusions of The thesis is arranged as three topics. The first topic is a joint work with my supervisor Paula Hill. We compare diverse measures of default risk (including both academic models and credit ratings) before examining its relationship with stock returns. The second topic is a joint work with my supervisors Neslihan Ozkan and Paula Hill and we examine the relationship between firm default risk and executive compensation. The third topic is a sole authored work in which I provide more evidence that correlated overpayments of CEOs and directors are symptomatic of agency problems related to cronyism. Cronyism is a term used to describe a phenomenon in which directors do not protect the interests of shareholders and choose to collude with the CEO for private benefits (Brick et aI., 2006). In the first essay, we find considerable variation in the mean probability of default across our academic models. The correlations between the measures of default risk are significant at a 1 % level and yet tend to be less than 50%. The rating-based measures of default risk (i.e. S&P's and Moody's ratings) are highly correlated with each other (0.962) but have a maximum correlation of 0.498 with the academic models. Moreover, we show that different assumptions can lead to divergent assessments of default risk even where default risk measures appear similar theoretically, such as those based on the theories of Black and Scholes (1973) and Merton (1974). Nonetheless, we find that the relationship between stock returns and diverse measures of default risk tends to be consistent. Default risk is a significant determinant of stock returns with a "hump backed" relationship, as predicted by Garlappi and Yan (20 11). This relationship holds even after controlling for very high default risk firms, which contrasts with the findings of A vramov et al. (2009) that the relationshi p between stock returns and default risk is driven by firms with low credit quality. Given the reasonable consistency in the observed relationship between stock returns and diverse measures of default risk, we find little evidence that differences in the conclusions of performance. However, these effects of excess compensation on CEO turnover are mitigated by total institutional ownership. In addition, as institutional ownership increases, the positive effect of director compensation on CEO cash compensation is also significantly reduced. FUlther, in firms with high levels of institutional ownership the negative impact of excess compensation on firm performance is weakened. The fact that external monitoring by institutional investors mitigates the effects of excess compensation means the excess compensation of directors and CEOs is at least partly due to agency problems.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.658840  DOI: Not available
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