Disagreement, career concerns, and corporate finance

This dissertation studies the effects of career concerns and disagreement in corporate finance. The first essay explores the economic role of disagreement on corporate governance. The second essay studies the effect of career concerns on corporate governance. The third essay examines the impact of disagreement on relationship banking.; The first essay develops a theory to study the political economy of CEO longevity by examining how agreement between the board and the CEO over the value-maximizing choice of project-investment action influences the length of CEO tenure and who succeeds the CEO. A key element of the analysis is that the CEO's entrenchment, rather than being taken as exogenously given, is endogenously determined in equilibrium by a tradeoff between the probability of CEO removal and firm value; higher entrenchment diminishes the probability of the CEO being removed and decreases firm value. The bright side of board-CEO agreement is that higher agreement causes the CEO to entrench less, leading to a higher firm value ex ante. However, the dark side of this agreement is that higher agreement also shields the CEO more from being fired upon bad performance ex post. Moreover, CEOs with higher agreement with their boards are more likely to be succeeded by insiders upon their departures. I find strong empirical support for these predictions of my model. This study also casts doubt on the validity of using CEO longevity as an empirical measure for managerial entrenchment, as has been routinely done in the literature.; The second essay examines corporate governance effectiveness when the CEO generates project ideas and the board of directors screens these ideas for approval. However, the precision of the board's screening information is controlled by the CEO. Moreover, both the CEO and the board have career concerns that interact. The board's career concerns cause it to distort its investment recommendation procyclically, whereas the CEO's career concerns cause her to sometimes reduce the precision of the board's information. Moreover, the CEO sometimes prefers a less able board, and this happens only during economic upturns, suggesting that corporate governance will be weaker during economic upturns.; The third essay addresses a fundamental question in relationship banking: why do banks that make relationship loans finance themselves primarily with core deposits and when would it be optimal to finance such loans with purchased money? We show that not only are relationship loans informationally opaque and illiquid, but they require the relationship between the bank and the borrower to endure in order for the bank to add value. However, the informational opacity of relationship loans gives rise to endogenous withdrawal risk that makes the bank fragile. Core deposits are an attractive funding source for such loans because the bank provides liquidity services to core depositors and this diminishes the likelihood of premature deposit withdrawal, thereby facilitating the continuity of relationship loans. That is, we show that banks will wish to match the highest value-added liabilities with the highest value-added loans and that doing so simultaneously minimizes the bank's fragility due to withdrawal risk and maximizes the value the bank adds in relationship lending. We also examine the impact of interbank competition on the bank's asset-liability matching and extract numerous testable predictions.