ESSAYS ON THE CORPORATE GOVERNANCE, COST OF EQUITY, CORPORATE OPACITY AND DEFAULT RISK

Qiongqi Xiao

This dissertation contains three essays. The first essay examines the effects of the audit committee and insurer characteristics on the cost of equity in publicly traded property-liability insurance companies. We find that audit committee size is significantly and positively related to the cost of equity, while the proportion of financial experts on the board and the number of audit committee meetings each year are significantly and negatively related to the cost of equity. Among the insurer’s characteristics, the reinsurance ratio is significantly and negatively related to the cost of equity, while investment risk and underwriting risk are significantly and positively related to the cost of equity. Furthermore, during the financial crisis, the cost of equity increased significantly. Finally, the cost of equity decreased significantly after the implementation of SOX. The second paper examines the impact of audit committee characteristics and insurers’ characteristics on insurers’ default risk using a sample of 455 U.S. publicly-traded property-liability insurer-year observations. We find that insurers with a higher proportion of financial experts on the audit committee and less frequent audit committee meetings each year have lower default risk. The evidence shows that some of insurers’ characteristics (leverage risk, investment risk and business Herfindahl index) are positively related to insurer’s default risk. Finally, we also find the effects of the audit committee characteristics and insurer’s characteristics on default risk are different post Sarbanes-Oxley Act and during the period of financial crisis of 2007-09. The third paper examines the association between corporate opacity and the cost of equity in publicly-traded property-liability insurance industry. We find that insurers with greater corporate opacity have a significantly higher cost of equity after controlling for book-to-market ratio, market value, beta, idiosyncratic risk, price momentum and leverage ratio than do firms with lower corporate opacity. We also test the impact of financial analysts following, financial experts on the audit committee, and CEO/Chairperson duality on this effect. Further analysis shows that the implementation of SOX and the Financial Crisis affect the association between corporate opacity and cost of equity.

ESSAYS ON THE CORPORATE GOVERNANCE, COST OF EQUITY, CORPORATE OPACITY AND DEFAULT RISK

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