Essays in financial economics

Simintzi, Elena (2012) Essays in financial economics. Doctoral thesis, University of London: London Business School.

Abstract

This thesis examines how product and input markets interact with firms' financial and real decisions and thus impact corporate policies. The first part of the thesis documents empirically how strategic considerations provided by product markets affect firms' investment decisions. It shows that firms react to actions taken by competitors when these indicate a competitive threat. Using news from restructur- ing announcements of manufacturing sites in the UK, it shows that other locally competing firms respond to the news by increasing their investment in capital if the restructuring action improves the competitive position of the announcing site. It also demonstrates the importance of financial constraints, showing that their existence dampens firms' ability to respond to the news. The fact that all restruc- turing announcements involve layoffs, and therefore impact firms' input markets, allows studying further responses by competitors, and namely their wages and hiring policies. The remaining part of the thesis focuses on how labor markets affect firms' capital structure and real activities. First, it examines the eect of labor regulation on firms' ability to access external finance. Exploiting changes in employment protection laws in 21 OECD countries, it shows that worker-friendly labor laws are negatively associated with firm leverage. In terms of firms' real activities, increases in employment protection legislation lead to lower firm invest- ment and growth and this effect is more pronounced for firms which depend more on external capital. These findings suggest a supply-side channel through which labor regulation hinders growth, that is, labor crowds out external finance. Finally, this part of the thesis examines the effect of labor bargaining power on firm leverage. It revisits the existing dominant paradigm that firms use debt to improve their bargaining position against labor and identifies an alternative channel which uncovers a negative relation between bargaining power of labor and firm leverage.