Two essays on information asymmetry and corporate governance
Vinjamury, Naga Venkata
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The underlying theme connecting both my essays is the issue pertaining to information asymmetry and corporate governance.In my first essay, I analyze whether the information environment has an influence in shaping corporate governance mechanisms for large complex banking organizations. In this context, I focus on corporate board size and corporate board independence which have been identified in the literature as important corporate governance mechanisms. In addition, the role of CEO option based compensation in an informationally opaque environment is explored. The study identifies market based, quasi market based and accounting based proxies for information asymmetry in the banking industry. These proxies are used to analyze their role in shaping corporate governance mechanisms in the banking industry. The results of the study document an inverted U-shaped relationship between proxies of information asymmetry and bank board size across the banks during the sample period. An inverted U-shaped relationship is also documented between proxies of information asymmetry and bank board independence within banks for the same sample period. At the same time, there is little evidence to support the notion that opaque information environment creates a need for greater CEO option based compensation. Finally, the study documents a positive relationship between outside director ownership and board size and a positive relationship between outside director ownership and board independence. This relationship is consistent with the view that when incentive alignment between insiders and shareholders (measured in terms of ownership) is relatively weak, the need for external monitoring by means of additional board members who are independent directors increases. In my second essay, I seek to identify corporate governance mechanisms that can potentially address the issue of informational asymmetries affecting firms early in their life cycle. Specifically, the study focuses on Real Estate Investment Trusts (REITs) at the IPO stage to empirically examine the role of corporate governance mechanisms in minimizing informational asymmetries. The study documents REIT corporate board structure in terms of board size, board independence and board financial expertise at the IPO stage. The study uses REIT IPO underpricing as a gauge of information asymmetry for REITs. This is an important contribution since very little is known about REIT governance structures at the IPO stage vis a vis the information environment. The results of the study indicate that smaller boards experience lesser degree of underpricing at the IPO stage. Study documents a positive relationship between board size and board independence, suggesting that larger boards on average have proportionately more independent directors. There is no evidence to suggest that board independence and financial expertise reduce the degree of REIT underpricing. This may be due to the unique nature of the real estate industry. REITs frequently access capital markets because they are required to payout 90 percent of their taxable income as dividends. Accessing the capital markets frequently, subjects REITs to enhanced market scrutiny compared to other industries. In this context, additional internal scrutiny by independent directors and financial experts may not play a crucial role for REITs. The study provides some evidence to show a decline in REIT underpricing after the enactment of REIT Modernization Act of 1999. However, the evidence with respect to REIT Modernization Act of 1999 is not conclusive.