Three essays on the funds allocation of U.S. Firms

Abstract

In essay one, we distinguish between two types of equity capital namely, proceeds collected from the exercise of employee stock options and those raised from all other equity issues. We examine the spending patterns of these proceeds and find that firms do not have a greater tendency to spend option proceeds than they do with other equity proceeds. In fact, option proceeds are so highly saved that cash savings constitute its major use, followed by investment and equity repurchase. That said, more financially constrained firms allocate more option proceeds to investment and less to equity repurchase. We also show that option proceeds are important in explaining the time trend of the cash holdings of U.S. firms.

In essay two, we employ comprehensive measures of investment and cash flow, and evaluate the findings of Chen and Chen (2012) that the investment-cash flow sensitivity of U.S. firms has disappeared over time. We show that the said sensitivities were distinctive from zero for all sample years, and that the apparent disappearance of investment-cash flow sensitivity resulted from Chen and Chen (2012) using a restrictive measure of investment i.e., capital expenditure. We then show that the cash flow sensitivities of non-capital expenditure investments offset, to some extent, the decreasing capital expenditure-cash flow sensitivity such that the overall investment-cash flow sensitivity has not disappeared over time.

In essay three, we use a large sample of nonfinancial U.S. firms over the period 1971 to 2015 to examine how financial resources are allocated to different corporate uses. We find that the allocations of funds have changed over time; Firms have been shifting their funds allocations away from investment and working capital, and towards cash savings and debt retirement. Moreover, the time trends associated with these allocations are driven not only by changes in sample composition, but also by changes in allocation dynamics. We also find that these time-series changes in funds allocations are related to several macroeconomic factors.