Three essays on corporate finance
Date of Issue2016
College of Business (Nanyang Business School)
Essay 1 examines the impact of geographic concentration of institutional investors on corporate governance and firm value. We find that firms whose large institutions are closely located to each other experience higher forced CEO turnover-performance sensitivity, more frequent proxy voting against management, higher returns around CEO turnover announcements and Schedule 13D filings, larger increases in Tobin’s q (ROA), and greater liquidity. These results are robust to using the introduction of new airline routes as an exogenous source of variation in proximity and to using an instrumental variable approach. Our results suggest that geographic concentration of investors increases monitoring effectiveness. Essay 2 analyses the importance of investor risk preferences in shaping corporate risk taking. We exploit the male-female ratio among local residents to capture the variations in the risk preferences of firms’ investor base. We find strong evidence that firms headquartered in counties with higher male-female ratio adopt higher leverage, more capital expenditure and less cash holding. They have higher idiosyncratic return volatility, initiate more M&A bids, and are less likely to engage in corporate hedging. As a result of higher risk taking, such firms face higher loan spreads and more stringent loan covenants. These effects are much stronger among smaller firms and firms with less institutional ownership. We further establish causality by using the minimum drinking age in the 1970s across different states as an instrument for the local male-female ratio and find consistent results in the instrumental 5 variables estimation. Overall, our results support the argument that firms cater to investor preferences by taking higher risks in the regions with higher male-female ratio. Essays 3 studies how the geographical distances between major debtholders and shareholders affect the firm’s risk shifting behaviour. We argue that longer distances amplify the debtholder-shareholder conflict by reducing observability and increasing information asymmetry between the debtholders and the shareholders. We find consistent evidence that the debtholder-shareholder distance increases the likelihood of covenant violation, idiosyncratic stock volatility and expected default frequency. It also relates to higher cash dividend payout and lower likelihood of corporate hedging. Following the firm’s covenant violation or dividend payout, the stock (bond) market reactions are positively (negatively) related to the debtholder-shareholder distance. We establish causality using an instrumental variable regression with the relative local equity and debt supply as instrument as well as using a difference-in-difference estimation based on a sudden reduction in travelling time between the shareholders and the debtholders following an increase in the number of direct flights.