Two Essays on Information Asymmetry and Agency Effects
Open AccessThe dissertation contains two chapters, which work in concert with each other in discussing extended questions that stem from two fundamental finance theories, adverse selection and moral hazard. The first study, titled with “Information asymmetry and Value of corporate cash holdings”, examines value variations of corporate cash holdings on information asymmetry. The paper tries to incorporate asset pricing literature and use price synchronicity to proxy for information asymmetry. The results suggest that firms with high information asymmetry would value cash higher, but the preference of cash holdings is in decreasing scale with level of cash holdings. The findings provide additional evidence for both pecking order theory and agency theory, and contribute to an understanding of how two competing theories reconcile each other.The second study, titled with “The Effects of Market Competition on Investment-cash flow Sensitivity”, examines the suppressing effects of market competition on investment-cash flow sensitivity. The paper use different proxies for competition measures including the Herfindahl-Hirschman Index and Capital-to-Labor ratio. To eliminate potential endogenous problem, one quasi-natural experiment is employed as additional. The results claim that competition pressure can discipline the firm and reduce the cost wedge between internal and external financing. Firms increase investments efficiency as indifferent between internal liquidity and external financing. The paper fills in the gap of literature in bridging industry attributions and firm behaviors. The findings have the tendency to support financial anti-monopoly and claim that competition can benefit market efficiency.
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