The Role of Corporate Governance during Subprime Crisis- From Human Behaviour Perspective

by

ACKNOWLEDGEMENT

I would like to express my thanks to my advisor, for his suggestions, comments, patience and understanding. Very special thanks to my parents, my father, my mother, my brother and my sister who were continuously supporting me throughout my life and leaving me free in all my decisions. I would also like to thank my colleagues for his technical support whenever I needed. I would like to thank to Department, all the university managers, teachers and students with whom I have worked.

I certify that the work presented in the dissertation is my own unless referenced

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DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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ABSTRACT

Currently economists are heavily engrossed in discussions on corporate governance as a result of the recent financial crisis. Questions like “is corporate governance a fatal influence on financial markets?” are being asked. In terms of recent financial crisis, we should consider whether weak corporate governance is to blame for the failure of Wall Street Financial companies and which eventually extended to a worldwide collapse. It is considered that corporate governance mechanisms have complicated internal and external systems from previous studies. The operation of firms and even the whole economic environment is influenced by corporate governance to some extent. The objective of this dissertation is to figure out some key factors within both external and internal corporate governance mechanisms and to find out how their weaknesses can lead to the collapse of firms during financial crisis. In particular, as for internal corporate governance, I mainly use case studies of the two Wall Street Giants, Bear Stearns and Lehman Brothers in the research section of this dissertation and analysed them from the perspective of their compensation systems. As far as the external aspect is concerned, I shall analyse regulation policy, more particularly, monetary policy and temporal house prices in the mortgage market. The conclusion chapter will discuss the failure of financial firms and its causes. The study will also put forward some recommendations and suggestions towards improving future corporate governance.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 01: INTRODUCTION1

1.1 Background of the Study1

1.2 Purpose of the Study2

CHAPTER 02: LITERATURE REVIEW3

2.1 Agency problem and concept of corporate governance.3

2.2 Corporate governance mechanisms6

2.2.1 Internal corporate governance mechanisms11

2.2.1.1 Board of directors11

2.2.1.2 Ownership structure14

2.2.1.3 Financial transparency17

2.2.1.4 Executive compensation17

2.2.2 External Corporate Governance Mechanisms18

2.2.2.1 Law/regulation18

2.2.2.2 Markets for corporate control19

2.2.2.3 Labour and Product markets20

2.3 Corporate governance in 2007-2008 financial crisis and valuation21

2.4 Summary of the Literature Review23

CHAPTER 03: METHODOLOGY24

CHAPTER 04: DISCUSSION27

4.1 Research on internal corporate governance- from perspective of compensation system27

4.1.1 Background of Bear Stearns and Lehman Brothers27

4.1.2 General performance30

4.1.3 Cash bonus and equivalent salaries32

4.1.4 Implications37

4.2 Research on external corporate governance- from perspective of regulation policy39

4.2.1 Why to choose the two indicators39

4.2.2 The housing price40

4.2.3 The monetary ...