Three Essays in Corporate Finance
Analytics
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Abstract
The economy and market have dramatically developed over the past decades. The corporations try to survive and urge to grow in such erratic circumstance. Two key dimensions are involved in winning a game of the law of the jungle: the management of minimum risk and the acquisition of maximum resource. This research studies risk management by investigating the usage of derivatives for hedging, and studies the acquisition of resource by examining corporate alliance activities. In the following each chapter we tend to answer whether and how corporate hedging and corporate alliance create value for firms, particularly for bondholders and shareholders.Chapter I we empirically examine the relation between corporate hedging and the cost of debt. Corporate finance theories suggest that firms benefit from hedging due to the reduction of bankruptcy risk, the mitigation of agency problems, and the alleviation of information asymmetry (Smith and Stulz (1985), Froot, Scharfstein, and Stein (1993), Campbell and Kracaw (1990), Bessembinder (1991), and DeMarzo and Duffie (1991)). In this paper, we empirically examine the relation between corporate hedging and the cost of public debt. Using a large sample of 1,832 U.S. firms from 1994 to 2009, we find strong evidence that hedging is associated with a lower cost of debt. On average, the cost of debt for hedgers with an investment grade rating is 19.2 basis points lower than that for non-hedgers. For speculative grade issuers, hedging firms pay a cost of debt that is 45.2 basis points lower than that of the non-hedgers. The negative effect of hedging on the cost of debt is similar across industry groups, and remains robust under a comprehensive set of controls and econometric specifications. Hedging initiation firms experience a drop in the cost of debt, while suspension firms bear a jump. We perform an extensive set of robustness tests to address the possible issue of endogeneity and the results remain strong in all tests. We further show that hedging leads to a drop in the cost of debt by reducing bankruptcy risk and the level of information asymmetry. However, we do not find evidence to support that hedging reduces the cost of debt by mitigating agency conflicts. Finally, hedging mitigates the negative effect of an increase in the cost of debt on capital expenditure and firm value, therefore suggesting that hedging promotes firm investment and creates valueAs an extension, in Chapter II we explore the influence of governance structure on managerial risk attitude, in particular, hedging decision. Corporate governance refers to the set of mechanisms that control firm decisions affecting the interest of firm shareholders, bondholders and managers. But the attitudes of stakeholders may diverge on risk preference due to their own interest. In this research we propose three hypotheses: (1) Hedging overcomes the inefficient market and maximizes firm value, so strong shareholder (bondholder) rights are positively related to the hedging strategy. (2) Hedging mitigates the risk-shifting problem and facilitates conservative firm investments, so strong shareholder rights are negatively related to the hedging strategy, whereas strong bondholder rights are positively related to the hedging strategy. (3) Hedging is used by managers for private benefits or earnings management purpose, so strong shareholder(bondholder) rights should be negatively related to the hedging strategy. By performing a comprehensive set of controls and robustness tests, we find strong evidence that both shareholder rights and bondholder rights are significantly and positively associated with corporate hedging decision. Our empirical research suggests that hedging is primarily used as a value-maximization device to both shareholders and bondholders.In Chapter III, we investigate whether joint ventures and strategy alliances create value for bondholders and stockholders by examining the wealth effects around the announcements of alliance events. Based on 3,243 alliance announcements from 1984 to 2011, we find that alliances create value for bondholders and stockholders. In a 2-month window, the mean abnormal return is 0.67% for bondholders and 1.06% for stockholders. We explore various explanations for the wealth effects. Joint ventures create value to bondholders through financial synergy and to shareholders through operating synergy. In addition, alleviation of financial constraints hypothesis holds for shareholder reaction, but does not help explain bondholder wealth effect. Moreover, uncertainty about profitability in the alliance industry has a positive and significant effect on bondholder and stockholder value. For strategic alliances, both financial and operating synergy effects contribute to bondholder wealth. Uncertainty about product market is significant for shareholder wealth. Finally, a bond-level analysis reveals that the impact of synergy effect on bondholder wealth varies significantly by convertibility, credit rating and the priority structure of bond contracts.