Three essays in corporate finance: Corporate control, product market-financial market interlinkages and managerial remuneration

The essays in this dissertation study the problem of efficient contracting among different agents of modern corporations and implications of regulations externally unposed by government and other regulatory organizations on such institutions.; The first essay, "Strategic Underinvestment, Managerial Entrenchment And Ownership Structure Of A Firm", establishes linkage between the investment decision and the security structure of a corporation. The essay shows that restrictions on managers' ability to issue non-voting equity cause managers who own equity in the firm to under-invest. Non-voting stock allows a firm to raise equity capital without a dilution in the managers' control rights and alleviates the under-investment problem. There are costs to the issuance of non-voting stock: managerial entrenchment, dividend dilution, and firms coming under the control of inferior managers. Non-voting equity is optimal when higher firm value because of higher investment outweigh the costs.; The second essay, "Cross Holding, Collusion and Capital Structure In A Repeated Duopoly Framework," augments a static model to develop framework for analyzing product and financial market inter-linkages. In a repeated game framework, two firms take positions in each other's equity, then compete in an imperfectly competitive product market. The model shows if cross holding is not regulated, firms can achieve cooperation in the product market without holding an actual position in the rival's equity. The threat to short rival's equity and play non-cooperatively if the rival deviates, is sufficient to enhance possibility of cooperation.; The third essay, "Managerial Remuneration In An Environment of Shareholders' Learning And Renegotiation Proof Debt" establishes a linkage between firm value, capital structure and managerial remuneration. The paper studies managerial compensation contracts in the presence of asymmetric information between manager and shareholders. The illustrative example shows that where shareholders have imprecise but improving cashflow verification technology, managerial remuneration contracts are nonlinear. Improving the verification technology implies that private benefit for the manager decline over time. Non-linear remuneration contracts are necessary to make the manager report output truthfully in the early stages of the project.