Essays on Corporate Governance and Delaware Incorporation

This dissertation consists of three essays on director compensation, CEO compensation, executive dismissal, and Delaware incorporation. Delaware incorporation is popular among publicly traded firms. However, the question of whether Delaware incorporation favors shareholders is an on-going debate. In the first essay, if Delaware incorporation indeed favors shareholders, it is expected that directors in Delaware firms are more likely to be encouraged to perform monitoring roles than those in non-Delaware firms. By using a sample of 620 Delaware firms and 437 non-Delaware firms from 2002 to 2005 in ExecuComp, we first find that Delaware firms pay their directors more compensation than non-Delaware firms. Second, Delaware firms tend to hold more meetings per year than non-Delaware firms. Finally, pay-performance sensitivities of cash compensation, equity compensation, and total compensation to shareholder wealth in Delaware firms are greater than those in non-Delaware firm. Therefore, Delaware incorporation appears to encourage effective board monitoring. This essay is the first attempt to examine director compensation by considering the role of state of incorporation. The findings support the view of race to the top (Winter, 1977) on Delaware incorporation. The second essay examines the impact of Delaware incorporation on how effectively directors monitor CEOs and protect the interests of shareholders. If directors do effectively monitor CEOs, the excess CEO compensation is expected to be positively related to firm performance. Following the method described in Brick et al. (2006), we find evidence that director excess compensation is significantly and positively related to CEO compensation in both Delaware and non-Delaware firms. However, unlike excess CEO compensation in Delaware firms, excess CEO compensation in non-Delaware firms is negatively associated with firm performance. Therefore, director compensation in non-Delaware firms may not be a more effective incentive for these directors to monitor CEOs than that in Delaware firms. The dismissal decision that a firm makes may be affected by state corporate law. The third essay examines the impact of Delaware incorporation on a firm\u27s choice of top management dismissal decisions. If Delaware incorporation indeed favors shareholders, we expect Delaware firms are more likely to dismiss their management members than non-Delaware firms when firms experience poor performance. We use the classification of top management dismissals defined in Boeker (1992). Our sample includes 388 firms that dismiss neither CEOs nor any lower-level executives (Type 1), 55 firms that dismiss CEOs but let lower-level executives stay (Type 2), 134 firms that dismiss lower-level executives but let CEOs stay (Type 3), and 59 firms that dismiss both CEOs and lower-level executives (Type 4) from 1993 to 2005. First, we find that a Delaware firm is more likely to dismiss at least one executive, either its CEO or a lower-level executive, than to dismiss neither the CEO nor any lower-level executive in a poorly performing year. However, this result only holds if we compare Type 1 firms with Type 3 firms. Second, Delaware firms are not more likely to dismiss their CEOs than non-Delaware firms. The results suggest that Delaware firms do not act significantly differently from non-Delaware firms on the choice of top management dismissal decisions when the firms experience poor performance. Therefore, Delaware incorporation alone may not be an effective external corporate governance mechanism to discipline poorly performing executives