Three essays in corporate finance
The dissertation contains three essays in corporate finance. The first essay examines to what extent shareholder gain from activism is the result of wealth transfer from employees of a firm targeted by activism. My baseline results show that target firms experience underfunding in defined benefit employee pension plans after acts of activism. My evidence suggests that the underlying mechanism of this wealth transfer is the agency conflicts between CEO-shareholder alliance and CEO-worker alliance. My identification strategy is to examine possible alternative explanations. My various tests reject alternative hypothesis such as sample attrition, management’s voluntary reforms, activists stock-picking skills, and the changes due to mean reversion. I also find that target firms experience funding shortfalls after activism. It appears that the underlying mechanism is the degree of managers’ entrenchment. Entrenched managers tend to create a worker-management alliance using employee stock ownership. Consistent with this hypothesis, target firms with employee stock ownership in the own company are less likely to experience funding shortfall. In the second essay, analyzing texts in Schedule 13D filings, I address important questions regarding shareholder activism: which forms of activism increases firm value and under what circumstances? I show that investors respond more positively to activist shareholders who use soft activism, communicating with their target firms’ managers or other shareholders rather than a harder approach. Overall, I provide empirical evidence that soft shareholder activism is value-enhancing. In the third essay, I show that a local culture of altruism influences corporate social responsibility (CSR). I measure the level of local altruism by the amount of contributions to charitable, educational, religious organizations, and other cash gifts. I find evidence of a positive relation between local altruism and CSR scores of firms headquartered in a US county. I also find that increased CSR concerns of firms headquartered near altruistic communities have a negative impact on stock returns. Overall, my empirical evidence shows that local culture affects firms’ CSR polices and investors who invest in companies located in altruistic communities react more to the increase in concerns than increase in strengths of CSR.