Three Essays in Corporate Finance

Abstract

The first chapter explores the causes and consequences of incorporating inventor directors into corporate boards. Our investigation reveals that firms opting for inventor director appointments are characterised by complexity and a pronounced demand for advisory input. At the firm level, our results show that firms with at least one inventor director on their board experience an increase in innovative output, as measured by patent counts, citations, and the economic value derived from these patents. The causal relationships between inventor director presence and innovation output are established through director turnover analyses, focusing on events of director departure and retirement. Our findings remain robust across a variety of additional controls, model specifications, and definitions of variables. Notably, the impact of inventor directors is more significant in firms with high advisory and monitoring needs. Furthermore, there are additive synergies when both CEOs and directors are inventors. Collectively, our research offers compelling evidence of the important role of inventor directors in enhancing board effectiveness, particularly in fostering an innovative landscape.

The second chapter investigates the relationships between inventor CEOs and earnings management, revealing that inventor CEOs are negatively associated with real earnings management, prioritising long-term value creation and financial transparency. Firms with inventor CEOs demonstrate higher earnings quality and transparency. Utilising a CEO turnover approach, we find that CEO turnover involving inventor CEOs increases both real-activity and total earnings management. This suggests that inventor CEOs' focus on sustainable growth and innovation diminishes the need for earnings manipulation, providing crucial insights for investors, analysts, and regulators. Additionally, high-productivity and active inventor CEOs are especially effective in reducing real-activity earnings management, with the negative correlation being more pronounced in firms with high analyst coverage and low board monitoring. This highlights the role of external and internal governance in shaping earnings management practices. Furthermore, we show that inventor CEOs, due to their long-term incentives, attract dedicated institutional investors and deter transient institutional investors. Finally, we find that inventor CEOs, due to their focus on long-term innovation projects, are negatively associated with earnings surprises, and that the effects of these earnings surprises on cumulative abnormal returns are more pronounced in firms led by inventor CEOs, as markets react more strongly to the inherent uncertainty and long-term nature of their innovative activities.

The third chapter studies the impact of R&D tax credits on the presence of inventor directors on corporate boards. We find that R&D tax credits are associated with a higher likelihood of having an inventor director on corporate boards. The effect is more pronounced in firms operating within high-tech industries, those with substantial R&D expenditures, and larger size. We show that the positive relationship is causal and robust based on a battery of empirical tests, including staggered difference-in-differences (DID) designs to explore the dynamic effects of R&D tax credits. Further analysis indicates that inventor directors, influenced by R&D tax credits, typically serve as internal directors, particularly within the C-suite, and enhance firms' innovation outputs. Furthermore, our research has documented that R&D tax credits are associated with increased director compensation, serving as a significant incentive mechanism. Overall, our findings bridge fiscal policy and corporate governance. Show more