Two Essays In Corporate Finance PDF Download

Abstract: This dissertation analyzes restatements of financial statements and the use of cross-listed stock by foreign firms in acquisitions of U.S. firms. The first essay examines the components of the CEO's compensation: stock options, equity holdings, restricted stock and long-term incentive plans (LTIP) and their relation to misreporting. A unique feature of options is that it allows executives to benefit if the stock price increases, while mitigating their loss if the stock price decreases. This essay shows that incentives from option compensation are positively associated with misreporting. An increase in the equity and restricted stock component of compensation has no impact on incentives to engage in such risky accounting. The use of long-term incentive plans and restricted stock do not extend a manager2s horizon relative to the short-term focus induced by options. Finally, we examine the market reaction to the announcement of a restatement. It is more negative for those restating firms in which the exercise of options was greater during the misreported period, providing support for the idea that options provide a 1camouflage2 for insider trading. The second essay examines the role of cross-listed stock in foreign acquisitions of U.S. firms. By cross-listing, a foreign firm reduces its cost of an acquisition made with equity by enhancing the rights of its minority investors and by decreasing barriers to ownership of its shares by U.S. investors. Cross-listed firms using equity to finance an acquisition pay less than non cross-listed firms paying with cash. Despite this benefit, cross-listed firms use equity less often than U.S. firms. Cross-listed firms from countries with poorer investor protection use equity less often than those from countries with greater investor protection. Moreover, they pay a higher premium when using equity. We find evidence supporting Hansen's (1987) risk-sharing hypothesis that using equity in an acquisition enables the bidder to share the risk with the target that the bidder overpaid, as the target is forced to share in any post acquisition revaluation effects. Finally, we find that while non-cross-listed firms use favorable exchange rate movements to bid more aggressively, cross-listed firms do not.