Monitoring Mechanisms, Risk, and Equity Prices
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What is the measure of the effectiveness of corporate governance? What is the relationship between corporate governance and performance? This thesis sheds light on these questions by examining the consequences of two kinds of corporate governance monitoring mechanisms, religion as an external mechanism and independent directors as an internal mechanism. Though recent work in finance and accounting provide evidence that religion is an effective external monitoring mechanism, whether it has pricing effects has yet to be examined. I explore this issue by investigating the relation between the degree of religiosity surrounding a firm’s headquarters and the firm’s cost of equity capital in Chapter 2. I find that firms located in more religious counties of the U.S. exhibit a lower cost of equity capital. The effects are also more pronounced for firms and during periods lacking alternative regulation mechanisms. Finally, I find that the effects of religion on the firm’s cost of equity capital are more pronounced for firms with greater information asymmetry. The second part of my thesis is motivated by the considerable debate on whether board independence is an effective internal monitoring mechanism. I offer a new perspective by examining the relationship between firm risk and board independence. I find that board independence is associated with a significantly lower level of idiosyncratic risk. Further tests suggest that firms’ idiosyncratic risk is negatively related to the independence of audit committees and nominating committees, but positively related to the independence of compensation committees. In addition, I find that firms with greater board independence display lower degrees of operating risk exposure, and are less prone to stock price crashes. My thesis makes several important contributions to the literature. First, my thesis shows that studying the important social factors that influence different agents and determine the deeds of collective groups may be important for corporate governance research and practice. Furthermore, my results provide robust evidence supporting the view that religion facilitates economic development. Finally, my findings provide an explanation for the insignificant relationship between board independence and firm performance documented by recent literature.