Essays in empirical corporate finance

Bian, Bo (2019) Essays in empirical corporate finance. Doctoral thesis, University of London: London Business School.

Abstract

This thesis contains three chapters that study how law and organizational structures affect real economic outcomes through the allocation of financial resources. The first part of this thesis documents that resource reallocation across firms is an important mechanism through which creditor rights affect real outcomes. I exploit the staggered adoption of an international convention that provides globally consistent strong creditor protection for aircraft finance. I find that across-firm reallocation accounts for most of the 12% increase in productivity after the Convention. Productive firms borrow more, expand, and adopt new technology at the expense of unproductive ones. Such reallocation is facilitated by (i) easier and quicker asset redeployment; and (ii) the influx of foreign financiers offering innovative financial products to improve credit allocative efficiency. The second part of this thesis examines how the organizational design of bailout institutions affects the outcome of bank bailout decisions. In the German savings bank sector, distress events can be resolved either by a decentralized county-level politician or by a centralized state-level association. We document that such decision is distorted by the personal considerations of county-level politicians. The probability of bailouts organized by them is 30 percentage points lower before an election. Using an IV approach, we show that decentralized bailouts result in inferior economic outcomes. These bailed-out banks perform more poorly, provision credit less eciently, and engage more in preferential lending. The third part of this thesis analyses the impact of government and private ownership of banks on corporate innovation. We find that firms that finance more through private banks have more innovative output. To establish causality, we exploit an IV approach and document a remarkable increase in innovation following an exogenous decrease in government ownership of banks. Moreover, the allocation of credit is more responsive to the financing needs of future innovators among private banks, shedding light on the mechanism. Overall our results suggest that government involvement in the allocation of credit crowds out private banking and comes at the cost of lower corporate innovation.