Three essays on corporate governance and ESG investing

Abstract

This thesis consists of three essays investigating the effect of internal and external corporate governance on corporate behaviours, as well as investigating the topic of Environmental, Social and Governance (ESG) finance. Chapter 2 seeks to understand the effectiveness of board of directors on firms’ environmental performance—a component of firm ESG metrics that has attracted increasing attention. We find that the busyness level of board directors has an important influence on corporate environmental performance. Exploiting the merger-induced exogenous shock to the number of board seats held by directors, we find that firms’ environmental performance significantly improves following the reduction in directors’ workload. The improvement is primarily driven by directors with relatively fewer commitments, greater environmental awareness, or larger formal capacity. In addition, the improvement is dependent upon firm-specific conditions including financial constraints, institutional ownership, and local stakeholders. Overall, this chapter highlights the importance of board commitment in shaping corporate environmental responsibility.

Chapter 3 investigates the effect of external governance by institutional investors in the M&A setting. We document important links between targets’ institutional ownership and takeover outcomes. Firms’ institutional ownership increases their likelihood of receiving stock-for-stock bids. The relationship becomes stronger when deals involve higher information asymmetries, suggesting that institutional ownership mitigates asymmetries. However, this stronger effect is not driven by the bidders with overpriced shares. Additionally, we show that institutions’ share retention decisions around mergers are motivated by their ex-ante estimations of synergies. Our findings suggest that institutions’ information advantage facilitates rational payment design (Eckbo, Makaew and Thorburn, 2018), alleviating potential deadweight losses associated with stock-for-stock offers.

Chapter 4 explores the topic of ESG finance in the mutual funds setting. We
find that funds with the highest level of ESG integration have monthly risk-adjusted returns that are 4 basis points higher than comparable funds with lower levels of integration. We find that the higher returns are concentrated in mutual funds with the highest level of ESG integration that are also exposed to firms where having superior information is most valuable, i.e., those with high disagreement in ESG ratings and those that experience incidents. Specifically, only funds with the highest level of ESG integration that over-weight high ESG uncertainty stocks outperform. Taken together, the results showcase the superior investment skill of ESG-aware fund managers.

Date of Award	22 Jun 2022
Original language	English
Awarding Institution	University of Bristol
Supervisor	Fangming Xu (Supervisor) & Kirak Kim (Supervisor)