Master thesis in it governance

Here's a glimpse of some relevant, real world topics our students tackle in their thesis projects. Following the annual tradition, a jury of Hertie School professors selected the three best posters for distinction. How legitimate are the commitments by food and beverage multinational corporations to tackle global nutrition challenges?

Students worked on their theses for the past five months under the supervision of a Hertie School faculty member. The master's thesis is an independent research project in which students apply the theoretical and methodological knowledge acquired in their studies to a practical policy problem relevant to their study programme. One objective of the master's thesis is to make use of the insights the students have gained in their studies for a practical institutional purpose.

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At the beginning of the 20th century this statement has received special topicality in the influential book of Berle and Means Academics report a large dispersion of stocks among shareholders in the largest US corporations. According to authors, the largest equity holder among 14 major US enterprises in owned 2.


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Being so widely diffused, none of the shareholders was able to dominate and had no interest to exercise his power over managers Berle and Means, , ch. The power attendant upon such concentration has brought forth princes of industry, whose position in the community is yet to be defined Discussing the negative consequences of such process, Berle and Means , Ch.


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  5. The following generation of researchers has been trying to solve the puzzles posed by authors. From a historical perspective the issues posed by Berle and Means have been addressed by the agency theory Jensen and Meckling, In 60s and early 70s, the agency theory was concerned with research of risk sharing among individuals Eisenhardt, The core notion of the agency is formulated by Ross He posits agency relationships as relations between principals and agents with multidirectional interests, where the expected residual return of each party is adjusted for these conflicting goals.

    The concept of agency is later advanced by positivist researchers Eisenhardt, Jensen and Meckling define agency relationship as a contract between agent and principal, which have conflicting goals and this conflict causes the agency costs. According to authors, agency costs are the sum of the monitoring, bonding and residual costs Jensen and Meckling, A principal in order to secure himself from the opportunistic behaviour of an agent incurs monitoring costs and provides compensation.

    The agent on his part bears bonding costs to guarantee his loyalty to the principal.

    The additional detriment suffered from remaining divergence in interests is residual loss. Agency theorists make recourse to the property rights concept and apply the theory in respect to private corporations Jensen and Meckling, They explain how managerial incentives cause the agency problems in different combinations of stock ownership and in the presence of debts. Scholars argue that when the corporation is fully owned by an entrepreneur, there are no agency costs because the firm is ran by its owner and he bears all the costs of his perquisites Jensen and Meckling, The additional increase in entrepreneurial efforts leads to maximization of his wealth and is entirely enjoyed by the manager.

    But as firm raises external equity capital the costs of managerial perks are shared by manager and the external stockholders. The entrepreneurial efforts of the manager will be limited to the wealth that is generated by the fractions of his stocks in the total equity of the firm. The raise of capital from the debts market creates managerial incentives to engage in risky projects because debt holders have senior claims in respect to shareholders.

    Hence they bear major part of risks. But opposed to the debt holders, the shareholders have the claim on the major part of earnings of such risky projects since the returns of the latter are fixed Jensen and Meckling, In the view of agency theorists, conflicting goals between equity holders and managers can be aligned by complete contracts, written or unwritten Jensen and Meckling, However in reality complete contracts are costly because they would have to be specified for all possible outcomes and legal consequences Hart The contractual perspective leads to understanding a firm as relationships of risk-averse agents pooling resources and establishing contracts motivated by value maximizing and cost minimizing behaviour Jensen, b; Fama, An elaboration of corporations into large enterprises with widely diluted equity ownership, agency theorists explain from an evolutionary perspective of effective risk sharing and capital allocation.

    In firms, demanding considerable amount of capital, the larger risks of future cash flow streams are effectively allocated among vast number of shareholders Jensen and Fama, According to authors, the need for efficient allocation of capital and risk diversification has led to elaboration of Stock exchanges.

    The supervising function has been delegated to talented managers. Jensen and Fama argue that organizations, forced by a competitive environment, have been able to survive because equity owners have successfully dealt with the agency problems assisted by market efficiency mechanisms. As decision making function is given to managers, monitoring functions are fulfilled by expert boards.

    In open stock corporations these monitoring functions are delegated to boards of directors, and in particular, the important monitoring function is fulfilled by outsider directors Jensen and Fama, Market efficiency assists by reflecting the agency costs in the prices of stocks. If agency costs offset and exceed expected benefits, investors recognize this which leads to the price decrease by the amount of agency costs borne by shareholders Jensen and Meckling, Further, firms with low market value become an easy target for hostile raiders who exploit the opportunity to take control over the firms and fire badly performing managers Manne, Fama suggests that another disciplining mechanism is external managerial labour market and internal competition among managers which put pressure and scrutiny on top managers.

    Master`s Thesis Risk Analysis and Governance - Study courses - UiS

    Thus, theories suggest that boards, potential susceptibility to takeovers and managerial competition serve as disciplining and monitoring mechanisms restricting managerial shirking. The key notions of the agency theory have laid theoretical foundations to Corporate Governance. Shleifer and Vishny argue that large shareholder and legal protection are the essential elements underlying the effectiveness of governance mechanisms. Authors explain that strengths of legislature predetermine the development of markets to concentrated or diffused ownership patterns across the world Shleifer and Vishny, Countries which have less friendly laws for minority shareholders are likely to witness large shareholders among equity owners because it would be the most efficient way to control management decisions Shleifer and Vishny, The weak system of governance mechanisms may lead to substantial agency costs borne by shareholders and non-value maximizing behaviour of executives Shleifer and Vishny, ; Morck, Shleifer and Vishny, For example, managers may establish unfavourable business relationships with companies they own thus carrying away wealth from shareholders Shleifer and Vishny, In other cases, managers may secure themselves from firing by investing in projects demanding specific knowledge, even if those projects do not bring value to shareholders Shleifer and Vishny, Following this context, the Corporate Governance has received the criterion of effectiveness in terms of ability of monitoring mechanisms to recognize and discipline shirking managers Weisbach, ; Kaplan a, b; Muravyev et al, Theoretical hypotheses of monitoring mechanisms have become a subject to considerable body of empirical studies.

    1 Introduction

    Coughlan and Schmidt and Warner, Watts and Wruck are among pioneers in this area. Coughlan and Schmidt examined whether monitoring mechanisms incentivize managers for positive abnormal stock returns and discipline in cases of poor stock performance. They obtained data for companies from Forbes Magazine for time periods. To check whether there was a relationship between compensation and performance they regressed real rate of change in pay as independent variable and abnormal stock return lagged for 1 year as dependent.

    The probability of Chief Executive turnover CEO following poor stock performance was estimated using the logit model. They found strong and statistically significant evidence that compensations are positively but management turnover negatively related to past stock performance. Warner et al confirm the evidence of disciplining for the period of Focusing exclusively on internal governance mechanisms they excluded cases with large transfers of share blocks accompanying management termination to isolate them as an external disciplining mechanism.

    Researchers distinguished between board turnovers, forced CEO departures, changes reported in Wall Street Journal WSJ and turnovers followed by an appointment of an outsider.

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    Researchers used 1 year market return of the Centre for Research in Security Prices CRSP index and company stock returns for current year, lagged for 2 and 3 preceding years as performance measures. Scholars isolated each type of turnover variable by running 4 regressions. The current year stock returns were statistically significant in each case. Kaplan a continued studies in US and switched to a later period of In addition, he examined turnover, compensation and firm performance relationships in Japan to compare the results.

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    Researcher reports that negative performance leads to increase in likelihood of executive turnover, while stock performance has positive effect on compensation Kaplan, a Kaplan a concludes that results are significant and strengths are similar for both countries. Further, focusing on the same time span and using the similar performance measures, he examined turnover of management board and Chairman of the board in Germany Kaplan, b. The regression yields statistically significant relationship between management board turnover and past stock performance, but coefficient is not significant for the chairman of board Kaplan, b.

    At same time, the coefficient of chairman turnover increases significantly if there was a loss in net income. Kaplan b reports that strength of turnover rates in Germany do not vary substantially comparing to US and Japan. Mikkelson and Partch compared managerial disciplining rates between periods of active takeovers occurred during and period of low takeover activity in The data was extracted from CRSP and Compustat databases for companies for the earlier period and companies for the second period.

    Voluntary changes were not isolated; however the estimation was controlled for CEO age. The designed performance measures - stock return and ratio of operating income to assets were adjusted to industry and size. The two periods were controlled by the dummy variable and interaction variables to capture periodical sensitivity of turnover to performance. The logit model indicated statistically significant results for dummy variables suggesting that turnover rates in active market period are sensitive to past performance, but insignificant for less active takeover market.

    Researchers report that the relationship of management turnover to past performance disappeared in the period of less active takeover market Mikkelson and Partch, The data was obtained from Wordlscope for the period from to and was pooled to a single sample. Forced turnovers were not isolated from voluntary because of unavailability of that information. Gibson assumes that border insignificance of market return is caused by relative inefficiency and illiquidity of stock markets in emerging markets.

    Overall, results were robust and the model passed the goodness-of-fit tests. Further, Gibson compared the coefficients with results for US obtained by Kaplan a. The strengths of results are similar in emerging markets and in US except for past stock market return Gibson, He reports managers in firms with large shareholders experience less disciplining which suggests that large shareholder may protect managers from outside pressure to pursue their own interest Gibson, Huson et al suggest that another quality indicator of governance mechanisms is election of managers who improve post performance of the firms.

    They used limited maximum likelihood method to examine how performance affects CEO turnover and how it changes following the new appointment. Researchers obtained data for all listed companies in Forbes compensation survey for the period of As Warner et al , they isolated CEO turnovers if there was a takeover in the preceding year. Researchers used accounting measures - industry adjusted returns on sales o ROS and returns on assets o ROA with operating income in the numerator Huson et al, They report statistically significant results for turnover rates following poor performance and post improvement of group-adjusted performance measures and interpret results as the evidence of increase in quality of newly appointed managers Huson et al, Weisbach finds that outsider dominated boards have a higher positive correlation with management turnovers than insider dominated boards.

    The final sample included company listed on NYSE for the period of CEO dismissals due to death, health problems and retirement were controlled with dummy variables. Other control variables included CEO ownership. Weisbach finds a significant negative relationship between CEO turnover and outsider dominated boards. He suggests that this relationship may be influenced by a third factor for instance CEO strength Weisbach, Researcher assumes that strong CEOs would form the board with loyal insiders, hence weak CEOs were more likely to have outsider dominated boards and experience disciplinary actions Weisbach, Similar to Weisbach , Borokhovich, Parrino and Trapani report significant relationship for successions in largest companies for the period of Probit model used in regression yielded strong evidence that outsider dominated boards increase the likelihood of CEO turnover.

    In addition they find, that outsider dominated boards are likely to hire new CEO from outside rather than it will be an inside succession Borokhovich et al, Bhagat and Bolton confirm these results for the periods. They were particularly interested how the role of independent of directors changed after the adoption of Sarbanes Oxley Act SOX in Researchers divided a sample of successions in pre data and post periods.

    They employed multinomial logit regression and controlled estimation for voluntary turnovers. As performance measures they designed two year lagged company and industry adjusted stock returns.

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    Other control variables included CEO ownership, age, tenure and firm size. Using interactive variable for proportion of outsiders in board and performance, they find that outsider dominated boards are effective monitors for the whole period Bhagat and Bolton, However, researchers state that their main finding is that outsider dominated boards have greater positive impact on firm performance after the adoption of SOX in Bhagat and Bolton, Yermack finds that companies with smaller board size perform better and are more likely to fire incumbent managers.

    Yermack finds statistically significant negative relationship between board size and firm value. Further researcher employed probit model to estimate how likelihood of CEO dismissal varied with board size. The regression was controlled for CEO ownership, age and firm size. In additional analysis, he estimated the effect of independent directors on CEO turnover using the same technique as Weisbach They find that turnover rates significantly increase only with purchases of share blocks and high financial constraints.

    Data on the composition of the board was compiled for each year from Practitioners extracted data from Data Stream, the Financial Times Nexus databases and annual reports for the period of to Management turnover was measured as the ratio of dismissals to the total board size. Authors isolated forced turnovers and left companies. The performance measures designed were industry adjusted annual abnormal returns, dummy variable when earnings were negative, industry adjusted return on equity ROE , and a dummy variable if dividends decreased or abolished.

    The estimation was controlled for takeovers, large transfers of shares and firm size. Faleye extended studies by focusing on small companies. From a data of Securities and Exchange Commission he isolated companies where CEOs were appointed in and dismissed until Management resignations due to death and health problems were excluded from observations. By employing a proportional hazard model Faleye estimated the probability of CEO turnover following after performance deterioration and examined whether turnover rates varied with the board size. Faleye reports the likelihood of management turnover increases with poor performance.

    Chakraborty and Seikh confirm these results for management changes during They identified and sorted out forced turnovers. The estimation was controlled for firm size, age of CEO, year and industry dummies.