HBS Theses and Dissertations

In the first section of the dissertation, I examine whether boards that are heterogeneous along six dimensions--age, gender, race, tenure, rank, and function--perform their most critical tasks better than boards that are more homogeneous. Using director information obtained from multiple sources and supplemented by extensive hand-collection, I estimate board heterogeneity along each of the dimensions and two aggregate measures of board heterogeneity: demographic and occupational. I find that occupationally diverse boards exhibit significantly higher CEO performance-turnover sensitivity, greater likelihood of significantly improved performance following CEO replacement, and lower excess compensation. The findings are mainly driven by tenure and rank heterogeneity. There is no evidence that any dimension of the demographic heterogeneity impacts board effectiveness in a statistically meaningful way.

In the second section of the dissertation, I explore why certain dimensions of heterogeneity seem to impact board effectiveness more than others. Focusing on gender, I show that director heterogeneity improves board effectiveness for the subset of firms that committed to diversity prior to regulatory pressures, but not for the subset of firms that changed the director mix in response to external calls for diversity. This finding points to tokenism as the likely explanation for lack of impact of demographic heterogeneity on boards' ability to act effectively. Consequently, it suggests that imposing regulatory pressures on firms to increase the level of diversity may not make boards more effective: although director heterogeneity can improve board effectiveness, such improvement may not be achieved if heterogeneity is adopted in response to regulatory pressures rather than voluntarily.

This dissertation consists of three essays that explore the financial accounting standard setting process. In the first, I examine the extent to which the FASB's agenda determination is a function of the contemporaneous preferences of its primary constituents: auditors, preparers, and financial statement users. Using the FASB's consultation with the FASAC as a lens through which to view constituent preferences, I find evidence that from 1982 to 2001 influence on FASB agenda decisions is concentrated among "Big N" audit firms, whereas from 2002 to 2006 the preferences of financial constituents appear to be most significant. Across both periods, I find no evidence of significant preparers' influence in agenda formation, which is in contrast to their documented role in later stages of standard setting.
The second essay, written with Karthik Ramanna and Sugata Roychowdhury, examines how tightening of the U.S. auditing oligopoly--from the Big 8 to the Big 4--has affected incentives of the Big N as manifested in their lobbying preferences on accounting standards. We find, as the oligopoly has tightened, that Big N auditors are more likely to express concerns about decreased "reliability" of FASB-proposed accounting standards (relative to an independent benchmark). Robust to controls for various alternative explanations, our results are consistent with Big N auditors facing greater political and litigation costs attributable to increased visibility from the tightening oligopoly and decreased competitive pressure to satisfy client preferences. The results are inconsistent with the claim that Big N auditors increasingly consider themselves "too big to fail" as the audit oligopoly tightens. The third essay, written with Karthik Ramanna, investigates the effect of standard setters in standard setting. We examine how certain professional and political characteristics of FASB members and SEC commissioners predict the accounting "reliability" and "relevance" of proposed standards. Notably, we find FASB members with backgrounds in financial services to be more likely to propose standards that decrease "reliability" and increase "relevance," partly due to their tendency to propose fair-value methods. We find opposite results for FASB members affiliated with the Democratic Party, although only when financial-services background is excluded as an independent variable.

This study examines how financial reporting practices have shaped private equity's claims to diversification. Despite research showing that private equity lacks unique economic exposure, private equity firms and trade associations continue to promote private equity's diversification as a key investment benefit. I show that returns based on prior methods of valuation understate the economic comovement of private equity with the market, creating a diversification illusion. As private equity valuation methodologies have changed private equity returns reveal increased systematic risk and correlation to equity markets. Moreover private equity firms also encounter higher--not lower--costs when accessing capital under new valuation methods, a finding at odds with public--market research.

This dissertation investigates the role of intangibles in reducing financing frictions in credit markets and examines whether intangible collateralization is associated with risky lending in the corporate loan market by using a sample of secured syndicated loans. While the predominant managerial and scholarly perspective suggests that intangible assets are not eligible collateral, I find that twenty-one percent of U.S.-originated secured loans include intangible assets as loan collateral, and the collateralization of intangibles has significantly increased in the recent decade. I hypothesize and find that intangible redeployability and borrower reputation are positively related to the probability of using intangibles as loan collateral. I further hypothesize and find that collateralizing loans by intangibles significantly increases loan pricing and the supply of credit to firms. Moreover, loans secured by intangibles perform no worse to other secured loans. Finally, I triangulate these results using evidence from two field studies in a finance company and a private fund that collateralize and appraise trademarks and patents in liquidation. Overall, I provide evidence in favor of the hypothesis that intangible asset collateralization is an innovation in credit markets that alleviates financing frictions.