Essays on corporate finance and governance

This thesis explores topics on Corporate Finance and Governance. In the first chapter, I develop a dynamic agency model to investigate optimal managerial authority and its interaction with managerial compensation. I find that when hiring a manager, the principal delegates authority that is unresponsive to either the manager’s outside options or the firm’s recruitment costs, in contrast to promised compensation, which increases in both. Over time, both the manager’s authority and his compensation rise after good performances and decline after bad realizations. Authority-performance sensitivity decreases as the manager’s authority grows, resembling entrenchment. In contrast, pay-performance sensitivity increases with the manager’s authority. If managerial authority can be adjusted only infrequently, the optimal contract may allow for self-dealing. I find that in this case, early-career luck plays a disproportionate role in determining the manager’s authority and lifetime utility. In Chapter Two, I investigate the optimal financing and investment strategies of a platform enterprise featuring cross-group network effects. Networks are analogous to capital assets. A platform enterprise invests in the networks by making subsidies to users. I find that a platform enterprise, even as a monopoly, should make aggressive subsidies in the early stages of network growth. A platform with stronger network effects should make more subsidies at initial stages and enjoy a higher valuation. In terms of financing patterns, staged financing mitigates the limited enforcement problem, and ceteris paribus, the number of funding rounds decreases with the profitability of the platform and increases with required profits by financiers. I also find that the value of funds raised each round increases and the financing frequency decreases over time. In Chapter Three, I study a public firm’s choice of seasoned equity offering 2 methods and the subsequent stock performances. I document that small-size public firms which have conducted shelf SEOs tend to underperform with respect to expectations in the long run; the underperformance mitigates when the firm’s size becomes larger. A three-date model is built to capture this long-run underperformance, proposing that heterogeneity in investment opportunities and information asymmetry are two key underlying factors. Empirical tests in this paper support the model and show that small firms have lower cumulative abnormal returns and a lower level of new investments after shelf SEOs