Internal corporate governance

The two papers in this dissertation provide a theory examination and empirical implications for the structure of internal corporate governance mechanisms designed to monitor management and maximize the value of the firm.; The first paper presents a theoretical model of the interaction of inside and outside board members and how it affects the monitoring ability of the corporate board. I examine a model of the functioning of corporate boards, focusing on the relation between board monitoring and CEO succession. I show how the board structure affects the flow of information and the effectiveness of the corporate board and I endogenously derive the size and the composition of the corporate board that maximize firm value. The competition among insiders for CEO succession motivates them to provide inside information to boards. Outsiders provide incentives for insiders to reveal their information. Outsiders then use this information to help implement the projects that maximize the value of the firm. I also study how certain firm characteristics affect the optimal board structure. For example, firms with low verification costs to outside board members optimally require a majority proportion of outsiders on the board and firms with high verification costs optimally require a majority proportion of insiders on the corporate board. On average, optimal board size decreases with increases in verification costs. Finally, I also find that there is some residual agency cost even with the optimal board, and this residual agency cost varies with firm characteristics.; The second paper studies managerial incentive contracts and capital structure choices that maximize the value of the firm. Top management is assumed to be risk averse and all the claim holders of the firm are assumed to be risk neutral. I examine in detail the management project choices when the external claims in the firm are (1) all equity, and (2) equity and risky debt. I find that when a manager is risk averse, his incentives are more aligned with the interests of debt holders. Increasing the pay-for-performance sensitivity of the manager's compensation contract does not always increase the incentives of the manager to increase the expected level of risk of the project. This result is contrary to previous belief that higher levels of equity compensation would cause the manager to risk-shift. I also compare the benefits and costs of paying managers with options instead of giving them equity in the firm...