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Essays in Corporate Finance
Date of Award
Olin Business School
Doctor of Philosophy (PhD)
This dissertation seeks to understand the effect of information asymmetries on corporate liquidity choices and efficiency of bankruptcy resolution, and the role of pooling and reputational concerns on an originator's incentives to invest in signal precision. The first chapter identifies and provides a causal estimate of the economic importance of information asymmetries between corporate insiders and outsiders in equity markets on small public firms decision to hoard liquid assets. The second chapter develops a theory of securitization in which the originator's incentives to screen are endogenized and affected by reputational concerns to investigate the effect of the pooling of assets on screening and systematic risk. In the third chapter, we investigate the impact of relative bargaining power of firms over creditors during bankruptcy on ex-post firm performance, once the firm emerges out of bankruptcy. Although existing theories predict a causal link between firm opaqueness and firm cash holdings, endogenous and coarse measures of opaqueness hinder the identification of this link. Using the discontinuous requirement of financial reporting introduced by Sarbanes-Oxley Act, Section 404, we estimate the causal effect of opaqueness on cash holdings. We show that firms that comply with Section 404 and provide more reliable information exhibit lower cash holdings compared to observationally similar firms. Further, compliant firms that hold less cash exhibit higher R&D expenditures relative to non-compliant firms. This difference sheds light on the opportunity costs of holding cash.
In the second chapter, we develop a theory of securitization in which the securitization of large asset pools leads to a reduction in idiosyncratic risk but an increase in systematic risk, and the originate-to-distribute model of securitization is not sufficient for this result. The model is one in which the originator's screening incentives are endogenized, and screening and pooling of loans in securitization have both idiosyncratic and systematic risk consequences. The originator's screening incentives are affected by career concerns as well as by the impact of screening on the risk of the securitized portfolio. The effect of securitization on idiosyncratic risk and systematic risk occurs via a dilution of the originator's screening incentives, with greater dilution occurring as more loans are added to the pool being securitized. Further, when we endogenize the information acquisition incentives of the investors who purchase securitized claims, we find that there is an interaction between these incentives and the screening incentives of originators. A weakening of the issuer's screening incentives leads to weaker incentives for investors to become informed and a higher valuation uncertainty, creating a feedback effect that further weakens the issuer's screening incentives.
In the third chapter of my thesis evaluates the impact of bargaining between management and creditors on bankruptcy outcome and ex-post efficiency of bankruptcy resolution. We find that firms in which creditors (management) exerts greater (lower) influence in the negotiation process are more likely to be liquidated. Increase in power of creditors during the bankruptcy negotiations is associated with lower likelihood of re-filing and superior post-bankruptcy profitability among firms that emerge. However such ex-post efficiency gains come at a cost as increase in power of creditors also leads to a lengthier bankruptcy. The unique aspect of our analysis is our ability to correct for the selection bias engendered by our focus on firms that emerge out of bankruptcy using the Bankruptcy Abuse Prevention and Consumer Protection Act (BACPA) passed in 2005 as an exogenous shock to the likelihood of liquidation. Collectively, our results lend credence to the idea of allocating greater power to creditors in bankruptcy proceedings.
Chair and Committee
Anjan V Thakor
Mark T Leary, Lubomir Litov, John Nachbar, Isaac Kleshchelski
Cortes, Felipe, "Essays in Corporate Finance" (2013). Arts & Sciences Electronic Theses and Dissertations. 255.