Essays in corporate finance

Patnaik, Raja (2016) Essays in corporate finance. Doctoral thesis, University of London: London Business School.

Abstract

This thesis examines corporate investment decisions and financing choices of firms. It combines an introductory chapter, two essays and a concluding chapter. In the first essay, I investigate the impact of uncertainty on firm-level capital investment and examine whether this effect depends on the degree of competition that firms face. I exploit a unique empirical setting to construct a time-varying uncertainty measure that is exogenous to economic conditions and firm behavior. I show that higher uncertainty results in a decrease in investment for firms in more concentrated industries. The effect is stronger for firms that face higher costs associated with reversing investments. This finding is in line with irreversible investment models that predict a negative relationship between uncertainty and investment. In contrast, firms in highly competitive industries increase investment in response to higher uncertainty, supporting the argument that competition can erode the option value of deferring investment. In that case, other industry and firm characteristics such as operational flexibility can result in increased investment in response to heightened uncertainty. I also find economically significant effects of uncertainty on other types of investment such as R&D spending, advertising and investment in human capital. Collectively, my results illustrate that the degree of competition plays an important role in the link between uncertainty and investment. In the second essay, I examine the benefits foreign firms gain from cross-listing shares on a major U.S. exchange. I study sovereign credit rating changes in 49 countries to investigate whether secondary listings in the U.S. are associated with improvements in a firm's information environment. Controlling for systematic differences in firm characteristics between cross-listed and non-cross-listed firms, I document that firms without a cross-listing experience significantly negative abnormal returns around negative sovereign rating events, while foreign firms with secondary listings on major U.S. exchanges on average experience no significant surprise reaction. I show that these events are value-relevant for cross-listed firms and that the difference in abnormal return behavior is not a result of unobservable disparities in firm characteristics between cross-listed firms and firms without a secondary listing. I further examine heterogeneity in abnormal returns within the group of cross-listed firms and provide evidence for a link between trading activity in the U.S. market and abnormal returns of cross-listed firms around sovereign rating announcements. Several proxies for the amount of (private) information incorporated in U.S. share prices such as trading volume and price nonsynchronicity are determinants of abnormal return behavior for cross-listed firms around sovereign rating announcements. Ownership of cross-listed U.S. shares by more informed investors such as institutional investors similarly reduces price sensitivity to these events for cross-listed firms. In addition, I examine the lead-lag relationship between returns of cross-listed U.S. shares and the underlying home market shares and document information spillovers from the U.S. to the home market shares in the period prior to a sovereign rating announcement. These findings suggest that information revealed by credit rating agencies is for the most part already priced for cross-listed firms. Thus, they benefit from more informative stock prices as a result of informed trading on U.S. exchanges. These results provide an information based rather than corporate governance related explanation for the observed value premium of cross-listed firms.