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Three essays in corporate finance

Gao, Y. (2019) Three essays in corporate finance. PhD thesis, University of Reading

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The traditional emphasis of corporate finance has been on the firm's financial stakeholders, and their evaluation of, and response to, the firm's changing economic circumstances. Cornell and Shapiro (1987) argue that non-financial stakeholders play an important role in financial policy, and constitute a vital link between corporate strategy and corporate finance. In this thesis, I investigate how three groups of important of nonfinancial stakeholders (principle customers, government regulators, and employees of defined benefit pension sponsors) influence firm financial decisions, and examine the implications for financial stakeholders. In chapter 2, I investigate whether and how having customers who buy a large share of their output ( customer-base concentration) affects a supplier firm's investment decisions. Using a sample of finns reporting sales to major customers between 1977 and 2016, I observe a more aggressive investment policy among suppliers with a more concentrated customer base (CC). A thorough examination of alternative explanations reveals that a plausible explanation is the information channel. This channel is that suppliers in a more concentrated supply chain benefit from collaboration and lower information asymmetries. More specifically, I observe that suppliers with a high CC value pursue more aggressive investment policies, and generally invest in R&D and acquisitions, rather than safer capital investment. These effects are both economically and statistically meaningful. I observe that a one-standard-deviation rise in CC leads to an increase of 6.17%, 10.66%, 7.5%, 16.09% and 2.88% in total investment, new investment, R&D expenditure, net acquisitions and capital expenditure, respectively. Moreover, a one-standard-deviation rise in CC results in a shift of 28.52% from capital expenditure to R&D and acquisitions investment. In chapter 3, I provide empirical insights into the drivers of environmental innovation (EI) based on 2,996 firms from 2002 to 2012. I observe that environmental regulatory pressure has a positive and long-lasting impact on EI performance. I show that the environmental regulatory pressure has the biggest effect on firms in the middle range of EI performance. Furthermore, I find that enterprises with market power have a stronger incentive to respond to regulatory pressure for EI because they can more easily appropriate the economic value accruing from their innovative activity. Much of the prior literature stops at this stage and interprets the positive association between EI and policy stringency as evidence that policy stringency increases firm competitive advantage and the likelihood of business success. I argue that such an interpretation is a step too far, unless it can be shown that the EI caused by policy stringency has positive consequences for future business performance. The observed relationship between greater EI and more stringent environmental regulation could mean that the firms sacrifice shareholder wealth for stakeholder interest in environmental protection. For example, increased expenditure by a firm on EI could be a deadweight cost to comply with the regulations. Alternatively, a positive relationship between EI and environmental regulation could indicate a "win-win" situation where firms increase both productivity and competitive advantage; so that environmental regulation is a stimulator of firm innovation and it is consistent with longterm shareholder value maximization. If a trade-off (win-win) hypothesis is the dominant driver of EI, I expect to observe a negative (positive) relationship between EI attributable to regulatory pressure and future performance in our second-stage regressions. By applying a two-stage analysis, I find a positive association between EI due to regulatory pressure and subsequent firm business performance. This result does not support the claim that firms view EI as just an expense for shareholders. I provide evidence that El due to regulatory pressure is positively associated a finn's future returns, consistent with the win-win hypothesis that shareholders benefit from environmental pressure. In chapter 4, I explore the degree to which the debt-equity leverage of defined benefit (DB) pension sponsors varies with their pension liabilities. Two important theories of capital structure are the trade-off theory and the pecking order theory. The trade-off theory posits that a firm determines its optimal debt-equity structure by making tradeoffs between the benefits of increased leverage (e.g. tax benefits) and the costs of increased leverage (e.g. deadweight bankruptcy costs). Pecking order theory postulates that the capital structure choice is linked with information asymmetries between managers and investors. Asymmetric information favours issuance of debt over equity, whose cumulative effect is increased leverage; as choosing debt to finance a project signals that the management has confidence the investment will be profitable, and that the current stock price is an undervaluation. Issuing equity would signal a lack of confidence, and that the management feels the shares are over-valued. Using 2,860 U.S. public firms reporting DB schemes from 1987 to 2012, I find this relationship 1s significantly positive and economically meaningful. I observe that a one-standarddeviation rise in DBL leads to an increase of 14.55% in debt-equity leverage. Consistent with the pecking order theory, I find that DBL increase the probability of informed trading and analyst forecast dispersion, reduce the number of analysts following the sponsor, and that sponsor is less likely to issue equity, and more likely to issue debt.

Item Type:Thesis (PhD)
Thesis Supervisor:Sutcliffe, C.
Thesis/Report Department:Henley Business School
Identification Number/DOI:
Divisions:Henley Business School > ICMA Centre
ID Code:88902
Date on Title Page:2018

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