Essays in corporate finance

Baghai, R (2011) Essays in corporate finance. Doctoral thesis, University of London: London Business School.

Abstract

This thesis consists of four essays in the field of corporate finance. Chapter 2 studies whether a firm's equity ownership structure aects its product prices. Using product price data from the U.S. food retail industry, I show that publicly held corporations charge approximately 2% higher prices than their private counterparts. Among publicly held firms, I find that firms with more short-term investors have higher prices. Additional tests suggest that the observed patterns may be due to managerial short-termism, where short-term earnings pressure results in firms charging higher product prices. Chapter 3 employs a U.S. tax holiday as a natural experiment to study the eect of agency problems on cash distribution and investment decisions of firms. I document that companies with weak shareholder rights, compared to well-governed firms, experience more negative valuation consequences to the passage of the tax holiday. They are also more likely to repatriate funds under the tax holiday, and they repatriate more. While well-governed firms decrease investment after the repatriation, weakly-governed firms do not. Finally, unlike their badly-governed counterparts, well-governed firms pay a considerable fraction of the repatriated funds out to shareholders. The last two chapters, co-authored with Professor Viral V. Acharya (NYU-Stern, CEPR, ECGI and NBER) and Professor Krishnamurthy V. Subramanian (Indian School of Business), investigate whether the legal framework governing employer-employee relationships aects innovation in an economy. In Chapter 4, we present a theoretical model in which laws that make it costly for firms to arbitrarily discharge employees enable firms to commit to not punish short-run failures of employees and, thereby, encourage employees to exert greater eort in risky, but potentially mould-breaking, projects. We provide supporting empirical evidence using the staggered adoption of wrongful discharge laws across U.S. states, employing patents and citations as proxies for innovation. In Chapter 5, we identify similar effects in a cross-country setting. We find that within a country, innovation is fostered by stringent dismissal laws, especially in more innovation-intensive sectors.