Essays in corporate governance and international economics

This thesis is a collection of essays on Corporate Finance and International Economics. Chapter 1 analyzes patterns of investment, profitability and executive compensation when firms experience unexpected cash shortages or windfalls. It links the variation in these patterns of firm behavior to the level of investor protection based on the trade-off between risks and incentives in managerial compensation. The model implications are verified using data on the U.S. Oil Industry firms. The main empirical results indicate that: (1) there is over-investment and its level is directly proportional to the available cash; (2) better governance restricts the level of over-investment; (3) changes in cash flows are translated positively to CEO compensation; (4) higher investor protection weakens the positive co-movement of available cash and CEO compensation.; Relative CEO compensation, as measured by the ratio of average CEO compensation to the average wage in a country shows great variation across countries. Chapter 2 provides an explanation through a theoretical model that builds on the Lucas (1978) model of firm-size distribution. It concludes that: (1) the bigger the scale of operation; the greater the ratio of CEO pay to that of average wage; (2) improvement in the level of corporate governance reduces this ratio; (3) greater dispersion in firm ownership lowers relative CEO compensation and (4) a higher capital-labor ratio increases this ratio. A panel data set for 27 countries over 15 years is constructed to estimate an error components model that confirms the model implications.; Chapter 3 focuses on issues related to intellectual property rights. The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) enforces a harmonized standard of protection of intellectual property rights for all the members of the World Trade Organization (WTO). In spite of the controversy regarding the welfare loss consequent upon the adoption of these standards, there has not been much focus on alternative ways of mitigating this. This chapter studies two alternative remedies, namely outsourcing and technology spillover effects, to achieve Pareto Superior equilibria to compensate some of this welfare loss. Furthermore it shows that welfare effects of subsidizing R&D are asymmetric depending on the country.