DONG CHEN's Webpage at Duke University

DONG CHEN PH.D. CANDIDATE IN ECONOMICS 2007-2008

Phone: (919) 660-8036 or (919) 660-8165 (Office), (919) 641-2078 (Cell)

Department of Economics

Duke University, Box 90097

Durham, NC, 27708-0097

Research Fields: Financial Economics, especially Corporate Finance/Governance, Law and Economics/Finance, Microeconomic Theory, Applied Microeconomics

Areas of Interest: Corporate Finance/Governance, Boards of Directors, Credit Risk, Using Behavioral Biases to Explain the Behavior of Boards of Directors

References: Michael Bradley, Curtis Taylor, Simon Gervais, David T. Robinson

Working Papers:

Job Market Paper: The Monitoring and Advisory Functions of Corporate Boards: Theory and Evidence (December 2007)

ABSTRACT: I develop and test a model of the two primary functions of the board of directors of a public corporation: monitoring and advising management. The model shows that there is tradeoff between these two functions: advising management leads to lower monitoring quality and higher agency costs. It is therefore not optimal for the board to advise unless its ability to do so is sufficiently high to overcome these costs. To test the model, I use the number of independent directors who are at the same time executive board members of other corporations as an empirical proxy for the board's ability to advise. Consistent with the predictions of the model, I find that independent executives (IEs) are associated with lower monitoring quality and higher agency costs. I provide the first direct and comprehensive evidence for the advisory function of the board, by contrasting the corporate policies that executives choose for their own firms with those they advocate as IEs. I find that IEs are positively, significantly, and causally associated with firm performance. These results suggest that boards act optimally in balancing their monitoring and advisory functions, as predicted by the model. Finally, I argue that the significant relation between IEs and firm performance is due to the scarcity of IEs, and use the passage of Sarbanes-Oxley Act as a natural experiment to demonstrate the validity of this argument.

The Relation between Corporate Governance and Credit Risk, Bond Yields and Firm Valuation (with Michael Bradley, George Dallas and Elizabeth Snyderwine) (December 2007)

ABSTRACT: This study examines the empirical relations between the governance structure of public corporations in the United States and the rating and pricing of their debt securities. We study an unbalanced panel of 775 unique U.S. firms from 2001 through 2007 and identify several statistically significant relations between corporate governance factors and credit ratings, bond spreads and firm values. We find that credit ratings are negatively related to the presence of antitakeover measures for firms with speculative grade ratings and positively related to the presence of antitakeover measures for firms with investment grade ratings. Moreover, we find that spreads are positively related to the presence of antitakeover measures, and this relation is significantly stronger for firms with less than investment grade credit ratings. Our findings also suggest that more stable boards, defined as having attributes relating to board tenure, director liability indemnification and classified board structures are related to higher credit ratings and lower bond spreads. We conjecture that boards with greater stability may be better positioned to take into consideration the longer term interests of the firm as a whole, thus benefiting the firm’s creditors.

Pilot or Watchdog? A Theory of Endogenous Choice of Advisory Role by Boards of Directors (July 2007)

ABSTRACT: I extend the theory in my job market paper and consider the incentive for the board to advise when shareholders can or cannot monitor them directly. The theory implies that having large shareholders as monitors has benefit as well as cost. Although large shareholders can displace a less abler board ex-post, they also discourage the board to choose advisory role ex-ante, as such role will jeopardize their career as directors and hence private benefit associated with it.

How Independence Means Different Things for Different Independent Directors? (in progress)

ABSTRACT: I examine different monitoring and advising patterns for independent executives (IE, independent directors who are active executives for other firms) and other type of independent directors (INE). I find INEs are better monitors than IEs for the major governance functions, but are associated with lower advising intensity. I also find INEs are positively associated with firm performance except when using a structural estimation method, in which the association becomes negative. This contrasts with the robust positive association between IEs and firm performance. I document different turnover patterns for IEs and INEs, suggesting that the market for independent directors might be segmented.

On the Causality of the Association Between Corporate Governance and Firm Performance (in progress)

ABSTRACT: I examine the causality for the significantly negative association between Gompers, Ishii, and Metrick (2003)'s G-Index and firm performance, by testing whether G-index and its individual components are associated with proxies for management entrenchment, including lower takeover-likelihood, lower management and directors turnover, and higher CEO compensation. I fail to find evidence supporting these hypotheses, which implies the causality might go from performance to corporate governance rather than the other way around, consistent with recent evidence from other papers.

Last updated 12/24/2007