Essays in corporate finance

Erten, Irem (2019) Essays in corporate finance. Doctoral thesis, University of London: London Business School.

Abstract

My dissertation consists of three solo-authored essays in empirical corporate finance. The first chapter, called "The Shadow Disintermediation of Risk-Sensitive Capital" investigates the risk implications of bank capital requirements in the presence of shadow banks. I find that in response to higher capital charges as an exogenous shock to loan retention, banks originate riskier loans, and defaults are absorbed by shadow banks. I document a pecking order of credit risk transfer of banks vis-a-vis shadow banks that is consistent with strategic adverse selection. The findings suggest that in the presence of shadow banks, bank capital regulation could backfire by distorting banks’ screening incentives, and causing a credit risk transfer. The second chapter, called "The Economic Implications of Interest-on-Excess- Reserves (IOER)" studies the impact of Interest-on-Excess-Reserves (IOER) on bank lending. I exploit the staggered implementation of IOER across countries, and I document that it is an important determinant of banks’ portfolio allocations. I find that IOER, by reducing the cost of holding excess reserves, leads to increases in banks’ cash holdings, and crowds out bank lending. I also show that it increases the sensitivity of bank lending to monetary policy shocks. The findings collectively uncover a distinct bank lending channel of IOER. The third chapter "Shareholder Monitoring, Entrenchment and Corporate Policies: Evidence from Binding Say-on-Pay (SoP) investigates the corporate implications of binding say-on-pay (SoP). I study the UK Director Remuneration reforms (2013) which replaced shareholders’ advisory votes with legally binding ones on the entire executive pay policy framework. I show that the policy is associated with a Abstract 4 drop in executive pay, and an increase in the sensitivity of pay to poor performance. The findings suggest that increasing the restrictiveness of SoP makes shareholder monitoring more effective, and the way that corporate governance is implemented matters.