Liao, Shushu and Nolte, Ingmar and Pawlina, Grzegorz (2019) Three essays in corporate finance. PhD thesis, Lancaster University.
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Abstract
This dissertation is comprised of three stand-alone essays in the field of corporate finance. Chapter 1 provides an introduction and overview of the three essays (Chapter 2-4). Chapter 2 explores the driving force behind the observed declining pattern of investment-cash flow sensitivity, which has puzzled empirical researchers for a decade. It investigates the variation of capital adjustment costs in explaining the investment-cash flow sensitivity and shows that the decreasing trend of the investment-cash flow sensitivity can be explained by the gradually increasing costs of capital adjustment. Chapter 3 studies the behavior of the firms in the aftermath of the 2007-09 financial crisis. A negative shock to the collateral value, which results in tightening the borrowing capacity, leads to a protracted recession of the firms’ activities with the real business conditions unaffected. However, the effect of the collateral shock subsides when it coincides with a slowdown in the productivity. The reduction of labor adjustment costs causes investment and employment growth to decline more (less) aggressively with the negative productivity shock (collateral shock) and the trimming of labor adjustment costs fares better for the small firms. A flexible wage contract can significantly alleviate the negative impact of the collateral shock. While the equity issuance falls (rises) with the adverse productivity (collateral) shock, the cyclical behavior of equity financing is less pronounced for the more financially constrained firms. Chapter 4 is motivated by the endogeneity problem in standard regression methodologies, which may overlook the coefficient biases induced by the measurement error in the variables. The measurement error in Tobin’s q, which operates via the covariance between q and cash flow, plays an important part in explaining the time-series and cross-sectional pattern of investment-cash flow sensitivity. Moreover, even a high-order moment-based GMM estimator cannot address the bias if the measurement error is not independent of q (a non-classical error). Chapter 5 summarizes the main findings and concludes the thesis.