Essays in financial economics

Strebulaev, I (2004) Essays in financial economics. Doctoral thesis, University of London: London Business School.

Abstract

This Thesis investigates the impact of a number of imperfections in financial markets and assesses their importance for the pricing of financial assets. A central question in the Thesis is the extent to which imperfections can explain various observed phenomena in financial markets. In particular, we consider impact of transaction costs, liquidation costs and costs of distress, as well as bid-ask spread. The Thesis comprises five chapters. Chapter 1 describes the focus and purpose of the Thesis. Chapter 2 presents a model of dynamic financial policy where, as a result of transaction costs, firms adjust infrequently and investigates the implications for cross-sectional empirical tests. The results show that introducing infrequent adjustment has far-reaching consequences for the interpretation of capital structure tests. Chapter 3 studies the effects on ex-ante debt prices of strategic behavior on the part of equityholders and debtholders that arises where there are liquidation costs in default. The results show that this imperfection has an impact on debt prices. Using the data on government bonds, Chapter 4 studies whether the bid-ask spread is reflected in asset prices. The results demonstrate that this particular source of imperfection is likely to be of second-order importance. Chapter 5 presents conclusions and recommendations for further research.