Essays In External Corporate Governance

My dissertation comprises three essays that address several unanswered and unsettled questions on the role of institutional investors as external monitors. In the first chapter titled, "Media and Shareholder Activism," using more than twenty-five million firm-level media articles, I examine the role of media in shareholder activism events from 2002 to 2014. I find that conditioning on numerous observable firm-specific characteristics and unobservables, broader and negative ex-ante media coverage, is positively associated with the probability of a firm being a shareholder activist's target. I further document that media coverage also plays a crucial role in determining the outcomes of activism events. Target firms with ex-ante positive media coverage not only have significantly lower announcement returns but also have a higher likelihood of management winning. The second chapter titled, "CEO Overconfidence and Shareholder Activism," relies on extensive behavioral corporate finance theory and empirically explores whether managerial overconfidence is associated with hedge-fund activists' target selection and activism outcomes. Predictions from theoretical models point in different directions: activists mitigate overconfidence or activists avoid overconfident managers. We find evidence that hedge-fund activists are less likely to target firms with overconfident CEOs, after controlling for various firm and CEO characteristics and fixed effects. In the third chapter, "Hedge Fund Activism and Capital Structure," using a comprehensive sample of hedge-fund activism from 1994 to 2018 in the U.S., and closest propensity score-matched firms, we study whether hedge-fund activists influence the capital structures of targeted firms. We find that for over-levered firms, there is a significant positive association between firms' distance away from the target leverage and their likelihood of being targeted by an activist hedge-fund. However, rebalancing of leverage toward their target debt ratios post-hedge fund activist intervention is observed only among under-levered firms. Our findings are broadly consistent with the dynamic trade-off models of capital structure, where adjustment costs and agency benefits of leverage play a crucial role.