Three essays on corporate finance

Abstract

(First Chapter) We examine how shareholder financial difficulties affect firms’ risk-shifting behavior. Using the 2003 mutual fund scandal as a shock to institutions’ risk-shifting incentives, we find that lenders charge higher loan spreads and impose more covenants after the scandal. The results are more evident when the scandal is severer, when tainted institutions have a longer holding horizon before the shock, and when firms have greater shareholder-debtholder conflicts, poorer governance, and higher information asymmetry. Moreover, bond returns around the scandal announcement date are negatively correlated with stock returns. We also find increases in firm leverage, investments, and payouts after the scandal for firms whose tainted institutions suffer more in the scandal.