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Essays in corporate finance.

Arcot, Sridhar Rao (2007) Essays in corporate finance. PhD thesis, London School of Economics and Political Science (United Kingdom).

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Abstract

This thesis is divided into three chapters. Even though the three chapters have different aims, they all concerned with corporate finance. The first chapter concerns venture capital and chapters two and three deal with corporate governance. The first chapter deals with a special kind of security used in venture capital contracting -participating convertible preferred stock. Participating Convertible Preferred (PCP) stock is similar to convertible preferred stock but comes with participation rights. Participating rights allow the holder to participate in earnings along with common shareholders. PCPs play an important role in venture capital exits. The two major forms of exit observed in venture capital are initial public offerings (IPOs) and trade sale. Typically, a PCP stake is converted into common equity during an IPO exit but not converted in case of trade sales. We develop a model where VCs can signal the quality of their venture by costly conversion. We show that PCPs have the required features to implement the signalling mechanism. VCs signal by converting their PCP stake into common equity, when they exit from the venture and in the process give up some of their cash flow rights. We show that this can also help in alleviating the problem of entrepreneurial effort. Finally, we derive empirical implications for the two forms of exit. The second and third chapters are concerned with corporate governance. Firstly, we examine the effectiveness of the "comply or explain" approach to corporate governance in the UK. Using a unique database of 245 non-financial companies for the period 1998 - 2004. we perform a detailed analysis of both the degree of compliance with the provisions of the corporate governance code of best practice (Combined Code), and the explanations given in case of non-compliance. We rank the quality of explanations based on their information content. We find an increasing trend of compliance with the provisions of the Combined Code, but also a frequent use of standard and uninformative explanations when departing from best practice. We then use this data to analyse the extent of moral hazard problem in different groups of companies and the role of monitoring in alleviating it. The third chapter extends the above analysis. We use the dataset to identify well- governed companies by accounting for heterogeneity in their governance choices and investigate its association with performance. We find that companies that depart from governance best practice because of genuine circumstances outperform all others and cannot be considered badly-governed. On the contrary, we find that mechanical adherence to best practice does not always lead to superior performance. We thus argue that flexibility in corporate governance regulation plays a crucial role, because companies are not homogenous entities.

Item Type: Thesis (PhD)
Uncontrolled Keywords: Economics, Finance
Sets: Collections > ProQuest Etheses
Departments > Finance
URI: http://etheses.lse.ac.uk/id/eprint/2945

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