Corporate discipline and firm financial decisions, evidence from regulatory reforms

This PhD thesis, comprised of 3 essays, assesses the effect of corporate discipline on corporate decisions. To do so, I focus on regulatory reforms that are aimed to improve corporate discipline. In the first two empirical studies in this thesis, I employ a setup of corporate governance reform that improves corporate discipline through internal governance in the form of board reforms and internal control mechanisms in the emerging market context of India. In my third empirical study, I exploit the staggered initiation of M&A laws in 31 countries as a plausible source of exogenous variation in the market for corporate control which improves corporate discipline through external governance and analyse the impact on corporate risk-taking. To examine whether corporate governance reform (CGR) encourages or deters risk-taking, I examine three hypotheses related to corporate governance reform and firm risk-taking my first empirical chapter. Given the theoretical tension in the literature on the effect of CGR, my study aims to answer this question in the emerging market context of India. With a battery of robustness test, I show that risk-taking offirms in emerging market increases following CGR. This empirical chapter illustrates that corporate governance reform improves corporate discipline and discourages investment conservatism that could stem from private benefits. A version of this chapter has been previously published in the Journal of Corporate Finance. Using the same setup employed in the first empirical studies, I examine the potential substitutability of corporate governance and dividend payout in my second empirical study. Using different proxies of dividend payout, I show corporate governance reform substitutes dividend payment; however, only when the reform is accompanied by the expansion of personal penalties. Consistent with the theory of adequacy of punishment, the results underscore the merit of expansion of personal liability in regulatory reforms to stimulate deterring behaviour to credibly communicate the improvement in corporate governance regime. Finally, in my third empirical study, I employ staggered changes in M&A laws as a plausible source of variation in the market for corporate control and examine the effect of these changes on firm risk-taking. Robust to a battery of robustness test, my investigation reveals a positive causal relationship between the market for corporate control and value-enhancing risk-taking. Overall, in my thesis, I conclude that improved corporate discipline in the form of regulatory reforms positively stimulate risk-taking appetite and investment of firms and has a substitutive effect on the dividend payout.This PhD thesis, comprised of 3 essays, assesses the effect of corporate discipline on corporate decisions. To do so, I focus on regulatory reforms that are aimed to improve corporate discipline. In the first two empirical studies in this thesis, I employ a setup of corporate governance reform that improves corporate discipline through internal governance in the form of board reforms and internal control mechanisms in the emerging market context of India. In my third empirical study, I exploit the staggered initiation of M&A laws in 31 countries as a plausible source of exogenous variation in the market for corporate control which improves corporate discipline through external governance and analyse the impact on corporate risk-taking. To examine whether corporate governance reform (CGR) encourages or deters risk-taking, I examine three hypotheses related to corporate governance reform and firm risk-taking my first empirical chapter. Given the theoretical tension in the literature on the effect of CGR, my study aims to answer this question in the emerging market context of India. With a battery of robustness test, I show that risk-taking offirms in emerging market increases following CGR. This empirical chapter illustrates that corporate governance reform improves corporate discipline and discourages investment conservatism that could stem from private benefits. A version of this chapter has been previously published in the Journal of Corporate Finance. Using the same setup employed in the first empirical studies, I examine the potential substitutability of corporate governance and dividend payout in my second empirical study. Using different proxies of dividend payout, I show corporate governance reform substitutes dividend payment; however, only when the reform is accompanied by the expansion of personal penalties. Consistent with the theory of adequacy of punishment, the results underscore the merit of expansion of personal liability in regulatory reforms to stimulate deterring behaviour to credibly communicate the improvement in corporate governance regime. Finally, in my third empirical study, I employ staggered changes in M&A laws as a plausible source of variation in the market for corporate control and examine the effect of these changes on firm risk-taking. Robust to a battery of robustness test, my investigation reveals a positive causal relationship between the market for corporate control and value-enhancing risk-taking. Overall, in my thesis, I conclude that improved corporate discipline in the form of regulatory reforms positively stimulate risk-taking appetite and investment of firms and has a substitutive effect on the dividend payout