Browsing by Subject "Capital structure"
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Item A broader test of market timing theory of capital structure(Texas Tech University, 2007-05) Kaya, Halil D.; Hein, Scott E.; Mercer, Jeffrey M.; Cooney Jr., John W.; Bremer, Ronald H.This dissertation attempts to answer these three main questions: (1) Is there evidence of market timing by corporations in equity, public debt, private placement, 144a, and syndicated bank loan markets? (2) Does market timing in each of these markets have a persistent impact on issuing firms’ capital structures? (3) What are the factors that affect a firm’s decision to use a specific type of financing? I find evidence of market timing in IPO, SEO, public debt, private placement/144a, and syndicated bank loan markets. I find that hot-market IPO and SEO firms issue substantially more equity than cold-market firms do. In all three debt markets, firms incorporate the observed changes in the interest rates into their decisions on how much to borrow from the creditors. However, firms do not incorporate or are not able to incorporate their predictions for future rates into their decisions on how much to borrow. In public debt and syndicated bank loan markets, firms use both the observed changes in interest rates and their predictions for the future rates as their main criteria for their maturity choice. However, for private placements and 144a issues, they use only the observed changes in interest rates as their main criteria for maturity choice. Although market conditions have an impact on the amount of financing and the maturity of debt financing, I find that they do not have an impact on a firm's choice between equity and public debt, public debt and private debt, and private debt and syndicated bank loan financing. On the other hand, equity market timing is a determinant of a firm's choice between equity and private debt financing, and syndicated loan market timing is a significant predictor of a firm's choice between public debt and syndicated loan financing. There is no evidence of a persistent impact of market timing in equity, public debt, private placement/144a, and syndicated bank loan markets. The results for the equity markets are consistent with the previous studies.Item Essays on business relations and corporate finance(2013-08) Demirci, Irem; Altı, AydoğanThis dissertation studies the impact of business relations on firms' financing decisions. The goal is to understand the determinants of business relations and how they interact with firms' capital structure. In the first chapter, I present a model which studies the role of customer risk in suppliers' financing choice. The base model predicts that when faced with a high-risk customer, suppliers with significant continuation values prefer equity over debt. The extended model allows for analyzing the supplier's decision to concentrate on a single major customer or diversify into multiple customers. The model shows that by decreasing the risk of premature liquidation, diversification allows for the supplier to take advantage of the bargaining benefits of debt. The second chapter empirically investigates the impact of customer risk on suppliers' capital structure. Consistent with the model presented in the first chapter, both cross-sectional and time-series regression results show that customer risk has a negative impact on suppliers' debt financing. Customer risk is an important determinant of suppliers' method of financing as well. During the first two years of the relationship, suppliers with high-risk customers are more likely to raise equity. Comparing the impact of customer risk on different supplier groups shows that firms that operate in concentrated industries and younger firms are more sensitive to changes in customer risk. In further analyses I find that the risk is transferred from customers to suppliers: There is a lead-lag relationship between customer and supplier credit rating changes. Also, suppliers experience an increase in volatility of their stock returns after they start a new relationship with a risky customer. Results from further analyses are suggestive of customer risk affecting capital structure through its impact on supplier risk.Item Essays on corporate finance(2010-08) Crane, Alan David; Hartzell, Jay C.; Titman, Sheridan; Almazan, Andres; Black, Bernard S.; Parrino, RobertThis dissertation addresses issues in corporate finance. Part I examines the litigation environment of a firm and its impact on financial policy. Chapter 1 discusses prior research, including theory and empirical results, related to firm performance, financial policy, and litigation. It provides the background to support the empirical analyses of Chapters 2 and 3. Chapter 2 examines the wealth effects of litigation events on the firms involved, as well as on their industry peers. I find that litigation events have a strong negative effect on both the firms sued, as well as their competitors. Chapter 3 examines whether managers use financial policy strategically when facing an increased risk of litigation claims. I find that greater litigation exposure leads firms to choose higher leverage. I show that this leverage increase is brought on by an active decision to repurchase shares. These repurchases appear to be financed with a combination of excess cash and short term debt as they coincide with a significant decrease in cash holdings and an increase in short term liabilities. These firms also increase their use of operating leases, which, due to their priority in bankruptcy, have similar characteristics as secured debt. Finally, the effects seem to be stronger for firms with a higher probability of bankruptcy. Part II asks whether there is a disposition effect in corporate investment decisions. Chapter 4 provides a summary of the existing literature related to the disposition effect and discusses both theoretical and empirical findings. In Chapter 5, I utilize the unique nature of Real Estate Investment Trusts (REITs) to test for the presence of the disposition effect in corporate investments. The results show strong statistical evidence that REIT managers tend to sell winners and hold losers, where winners and losers are defined using changes in properties’ prices since they were acquired. In addition, I find evidence that this behavior is consistent with the disposition effect. REIT managers are significantly less likely to sell properties that have a loss relative to a reference point based on inflation or historical average returns, controlling for the properties’ recent returns.Item Essays on corporate finance and product market competition(2014-08) Lee, Bomi; Cohn, Jonathan B.; Titman, SheridanThis dissertation contains two essays on the aggressive behavior of corporations in product market competition. In the first essay, I investigate how market structure can impact a firm's risk of facing predation by rivals, and hence, its financial policy decisions. Using a simple model, I demonstrate that a firm faces a greater predation threat when it meets the same competitor in many markets, as this competitor is able to internalize more of the benefit, degrading the firm's ability to compete in the future through aggressive actions today. I then test the predictions of the model using 2003-2011 panel data on store location across retail store chains in the US. I find that firms tend to expand more aggressively in markets shared with a competitor experiencing a substantial increase in leverage, or a decline in a credit rating, when they face that competitor in more of the other markets. The expansion relationship was found to be stronger in data from the 2008-2009 financial crisis, a period when difficulty in rolling over or obtaining new debt made it especially hard for weak firms to absorb losses. I also show that a firm facing the same competitors in many markets choose lower levels of leverage and that it decreases that leverage when a merger in the industry increases the amount of competitive overlap it has with other firms. These results suggest that firms are aware of the predation risk due to a competitive overlap and select financial policies to minimize this risk. In the second essay, I study the impact of internally generated funds on product market competition. More specifically, I investigate the idea that firms compete aggressively when their competitors face cash flow shortfalls. Testing this idea is challenging because competitor's cash flow changes are potentially endogenous with respect to firm's behavior. I address this problem in three ways. First, I investigate firm's reaction in a given market when its competitors face cash flow shortfalls outside of that market; this analysis is conducted using store location data on retail store chains. Second, I focus on the 2008-2009 financial crisis period in which retail store chains were hit by a negative demand shock which was hardly expected ex ante. Finally, I use a shock to local economic conditions which varies across markets and the different distributions of store locations across firms as instruments for the changes in competitors' cash flows. I find that a firm expands more in a given market in which it competes with rivals which face a more negative cash flow shortfall in the other markets. This relation is stronger when the competitors were highly leveraged before the crisis. Finally, I illustrate evidence that a firm responds more aggressively to competitor's cash flow shortfalls if it competes with that competitor in many of the same markets; this result is consistent with the prediction of the model in Chapter 1. These essays contribute to the literature by adding new evidence on the predatory behavior of corporations in product market competition.Item Health care and corporate finance(2015-12) Towner, Mitch Scott; Starks, Laura T.; Cohn, Jonathan B.; Fracassi, Cesare; Alti, Aydogan; McInnis, JohnThis dissertation examines issues in U.S. healthcare and capital structure. In the first chapter I give a brief summary of the institutional details of the U.S. healthcare sector with a special emphasis on healthcare finance. In addition to its large size, U.S. healthcare has four unique features that can be used to help answer corporate finance questions: segmented markets, variation in corporate type, extensive data requirements and recent consolidation. I explain how changes over the last 100 years have led to each of these features. Next, I delve deeper into bargaining between insurance companies and hospitals, Medicare pricing, and hospital capital structure decisions during my sample period, 2008-2012. Finally, I conclude with a brief discussion on how the Affordable Care Act has contributed to these factors. In the second chapter I use the health care industry as a novel laboratory in which to study a firm's strategic use of debt to enhance their bargaining power during negotiations with non-financial stakeholders. I show that reimbursement rates negotiated between a hospital and insurers for a specific procedure are higher when the hospital has more debt. I also show that this effect is stronger when hospitals have less bargaining power relative to insurers ex ante, and that hospitals take on more debt when they have less bargaining power using six proxies including differences in state Medicare laws to further strengthen identification. This is the first paper to provide direct evidence that debt improves a firm's bargaining outcomes.