Three essays in corporate finance: predation and financial structure; patent litigation and deep pockets; why do firms go dark?
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My doctoral dissertation is composed of three essays in corporate finance. The first essay examines how the financial structure of a firm affects the extent to which it will be subject to predation when there is asymmetric information between firms and investors. Myers and Majluf have shown that a firm may forego a positive net present value investment when financing the project would require it to issue undervalued stock. As I show, in a similar setting where giving up the project benefits competitors, rivals may compete more aggressively in order to lower the prey’s stock price. The second essay investigates whether aggressive patent litigation could in part be driven by the predatory motives of deep pocketed firms. I examine whether the share price reaction to the announcement of patent litigation is related to the relative financial strength of defendant and plaintiff firms, and whether firms that become the target of patent litigation are different from firms that were not sued over the same period. I find that the greater the size of the plaintiff relative to the defendant, the lower the cumulative abnormal returns (CARs) that accrue to defendants sued by their competitors. This work adds to earlier empirical research on patent litigation as well as the literature on the relationship between product market competition and financial structure. The third essay (joint work with Nadia Massoud) seeks to answer two important questions. First, why do firms choose to “go dark”, i.e. deregister with the Securities and Exchange Commission (SEC) and delist from the major exchanges despite having a large number of outside shareholders? Second, what are the consequences of going dark for shareholders? We find that firms with fewer valuable growth opportunities, greater insider ownership, lower institutional ownership, higher leverage and lower market momentum are more likely to go dark. Furthermore, the cost of complying with the Sarbanes-Oxley Act, as reflected in audit fees, has also been a driving force behind the going dark phenomenon. Finally, shareholders suffer significant negative cumulative abnormal returns upon the announcement of the firms’ deregistration.