Essays on Corporate Governance

This thesis consists of three theoretical essays, all concerned with the contribution of corporate governance to the creation of firm value. In the first essay, A Signalling Model on the Co-Determination of Capital Structure and Corporate Governance, a firm signals its productivity to external investors through either the decision on which security to issue and/or its governance. Agency costs arise due to the manager's ability to divert profits. The manager is induced to behave through either costless tight governance; or costly incentive-pay under a loose governance. We show that: a) as signalling instruments, debt and loose governance are substitutes; b) the relationship between good governance and productivity can be non-monotonic depending on the agency costs. In the second essay, Optimal governance, CEO pay and the availability of better CEOs, shareholders have to provide effort incentives to a manager who: i) enjoys private benefits from retention; and ii) may become an unsuitable match after hiring. To maximize ex-ante profits, shareholders controls the manager's pay and the independence of the board that has to decide on his retention. We solve for the two instruments simultaneously and find that managerial entrenchment is used as an effective incentive tool along with pay. The optimal contract, which is renegotiation-proof, explains firms' rigidity to changes. In the third essay, Is reward for failure the way to incentivize managers to adapt?, we show that pay-for-bad performance and the adoption of anti-takeover measures that protect low-performing managers may result from shareholders' interest to give status-seeking managers the right incentives to increase firm's adaptability to market changes when: a) manager's compensation is based on short-term pro?ts, but his status depends on retention; and b) the manager is multitasking. Furthermore, both the size of the golden parachutes and the performance-sensitivity of turnover ultimately depend on how status affects manager's risk attitudes.