Three essays in corporate finance

This Ph.D. dissertation includes three essays in corporate finance, which covered topics including human capital in board of directors, the punishment effect in credit rating industry and the signaling environment change in convertible bond market. My first research investigates the importance of cultural diversity in board that can increase the firm level innovation output. I find that the diverseness of educational, professional, and cultural backgrounds in the board influence corporate innovation. To be more specific, firms with foreign experienced directors exhibit higher innovative activities. I also find this effect is more pronounced for foreign returned directors who graduated with a science-related degree or had a more extended overseas working experience. Further, the positive cultural diversity effect on innovation is more pronounced when the director's foreign experience is gained in the countries with high corporate governance, management practice and intellectual property rights protection. The second essay investigates whether punishment can effectively control any wrongdoing in the bond rating industry in China. My results suggest that the punishment event on Dagong, one of the largest CRA in China, only has a limited effect in controlling wrongdoings for punishee, Dagong, and non-punished peers. This punishment regulated the behaviour of Dagong during the business suspension period, and Dagong gave out more inflated and less informative ratings after its re-entry to the market. I further investigate non-punished peer CRAs in the market. I find that after observing the punishment event on Dagong, higher market power competitors provided higher quality ratings, but lower market power competitors became more aggressive in rating inflation. Lower market power competitors have higher incentives to win the market share by undertaking rating inflations during the business suspension period of Dagong rather than higher market power competitors who have a higher reputation concern. Moreover, Investors became more conservative about a rating change after viewing the punishment event, which suggests that this punishment event lost investors' trust. In my third essay, I study the changing of signalling environment that affects majority shareholders' subscription behaviour in the convertible bond offering of Chinese listed firms between 2016 and 2022. My findings indicate that after the convertible bond market started open to retail investors in 2017, majority shareholders undertake more subscription behaviour of the issued convertible bond to send out a misleading noise for their personal benefit. After the convertible bond is listed on the market, they quickly sell the subscription amount within 42 days. The higher subscription amount does not signal the better quality of firms; instead, it shows both poor long-term operating performance and market performance. In 2022, after the government required a lock-up period to prevent quick sell behaviour, majority shareholders' subscription behaviour became a valid signal for firms' quality. This research shows that the changing signalling environment by altering the signalling cost and return can affect the incentive of stakeholders to send out a signal, which results in changing the effectiveness of signalling.