Three essays on corporate finance
Date of Issue2014
College of Business (Nanyang Business School)
The dissertation comprises three essays on corporate finance. Essay one examines the impact of executive stock ownership guideline on the company’s cost of debt financing. We find that the adoption of executive ownership guideline is associated with lower loan spread, fewer restrictive capital expenditure covenants, and fewer collateral requirements, suggesting that creditors prefer firms adopting the ownership guideline. These results are particularly pronounced when the ownership guideline is more likely to be binding, that is, when the CEO stock ownership is lower, or when the CEO is a newly hired manager. We also find that after the adoption of executive ownership guideline, firms’ risk taking incentives are reduced and the quality of their financial reporting is improved, further supporting the view that creditors benefit from the adoption of executive ownership guideline. Essay two investigates the relation between a firm’s hedging policy and its major customer relationships. We find that the likelihood of a supplier using derivatives to hedge interest rate risk is higher when a major customer has high leverage. This result is increasing in the supplier’s dependence on a major customer, such as when the customer represents a large share of its sales, when the supplier operates in a durable goods industry, or when the supplier makes high relationship-specific investments. We also find that hedging helps the supplier maintain durable relationships with customers, especially highly leveraged customers. Further, we find that announcements of customers’ bond offers, credit rating downgrades, and bankruptcy have significant negative effects on the market value of non-hedging suppliers while they have no such effects on that of hedging suppliers. These results suggest that a major customer’s financial distress risk is an important determinant of a supplier’s hedging policy, and that supplier hedging helps increase the perceived viability of the future customer relationship and alleviate potential negative spillover effects along the supply chain. Essay three studies whether the change in the local housing market condition has significant impacts on stock liquidity of local firms. We find that stock liquidity of local firms significantly improve when the local housing price growth is high, even after controlling for extensive state economic related factors. This result is robust to alternative measures of stock liquidity and the estimation of Two Stages Least Square Model. The increase in the stock liquidity of local firms is only observed for firms with high retail concentration (i.e., small size, low stock price, low institutional ownership or low analyst coverage). Further, when the residential property price growth is high, the R2 of local stocks with high retail concentration would significantly increase, indicating that less firm-specific information is incorporated into the stock price under strong housing market conditions. We also find that firms located in the state with higher housing price growth pay lower underwriting fees if they conduct seasoned equity offerings. This effect of lower cost of equity financing is also more pronounced for firms with high retail concentration. To the extent that rising home values strengthen households’ financial conditions, lower their leverage and encourage them to participate more in the equity market, especially, to trade more frequently in the local stocks due to their local bias, the liquidity of local stocks will improve as the local housing market is booming.