Three essays in financial economics

Schoenherr, David (2016) Three essays in financial economics. Doctoral thesis, University of London: London Business School.

Abstract

This thesis contains three chapters that study different aspects of financial economics. The first part of the thesis studies the effect of weakening creditor rights on distress risk premia via a bankruptcy reform that shifts bargaining power in financial distress toward shareholders. We find that the reform reduces risk factor loadings and returns of distressed stocks. The effect is stronger for firms with lower firm-level shareholder bargaining power. An increase in credit spreaids of riskier relative to safer firms, in particular for firms with lower firm-level shareholder bargaining power, confirms a shift in bargaining power fro bondholders toshareholders. Out-of-sample tests reveal that a reversal of the reform's effects leads to a reversal of factor loadings and returns. The second part of the thesis examines how social connections in elite networks affect the allocation of bank credit. We employ a unique dataset on members of an elite service club in Germany to study this question. Specifically, we investigate credit allocation decision of banks to firms inside the network. Using a quasi-experimental research design, we document misallocation of bank credit inside the network, with bankser with weakly-alinged incentives engaging most actively in crony lending. Our findings thus resonate with existing theories of elite networks as rent-extractive coalitions that stifle economic prosperity. The third part of the thesis exploits a unique institutional setting in Korea to assess the effects of firms' political connections on the allocation of government procurement contracts. After winning the election, the new president appoints several members of his networks as CEOs of state-owned firms. In turn, these state firms allocate significantly more procurement contracts to private firms with a CEO from the same network. Contracts allocated to connected private firms suffer from systematically worse execution and more frequent cost increases through renegotiations.