Essays on Corporate Finance
Open Access DepositedCorporations and financial institutions are both key players in the financial markets, making strategic decisions to maximize the value of their business operations. On one hand, managers of firms make strategic decisions to maximize the wealth of existing shareholders at the expense of new shareholders. Alternatively, managers execute business decisions to enhance their long-term profitability, with these corporate decisions depending on various factors such as future expectations, information asymmetry, and firm characteristics. Financial institutions, particularly lenders, respond differently in their lending relationships with corporate borrowers. They carefully evaluate and monitor various risks of borrowers and offer stricter loan contracts when borrowers face higher risks. However, lenders do not systematically respond to every risk posed by borrowers; instead, they become more lenient or stringent towards certain groups of borrowers, considering the same factors in their assessment of borrowers’ risks. In this dissertation, I examine the strategic decisions of corporations and lenders in their business operations. Understanding these decisions enables managers to improve their decision-making, competitive advantages, risk management, and ultimately contributing to their long-term growth and sustainability.The first chapter examines the propagation of corporate borrowers’ natural disaster risks to their lenders. Using covenant violations caused by natural disasters as a channel that transmits borrowers’ natural disaster risks to lenders, we investigate how lenders respond to these violations. We first find that disaster impacted firms are more likely to violate covenants and experience decreases in financing activities. This leads lenders to impose stricter loan and covenant terms to disaster impacted firms, reflecting their heightened concerns about the natural disaster risks of borrowers. More importantly, we observe different responses from lenders to covenant violations caused by natural disasters depending on firms’ capabilities to access funds. We find that, when firms have higher capabilities, lenders show leniency toward these violations by mitigating loan margin increments after disaster impacts. On the contrary, they restrict funding to firms that do not meet these criteria. These lenders’ heterogeneous responses to the natural disaster risks of borrowers align with the subsequent business performances of the affected borrowers, indicating that lenders accurately assess natural disaster risks and covenant violations of firms. Overall, our findings suggest that lenders do not systematically penalize every climate change risk of borrowers but consider other factors affecting firm recovery. The second chapter examines strategic behaviors of overvalued firms. We find that a firm is more likely to engage in acquisitions when its private information, measured by changes in purchase obligations, predicts that future profitability will fall and thus that its shares are overvalued in the current stock market. Overvalued acquirers are as likely to pay with stock as non-overvalued acquirers, suggesting that these firms do not necessarily take advantage of overvalued stock. Such acquisitions are followed by increases in profitability and generate positive announcement returns that are similar in magnitude to those generated by non-overvalued acquirers. In addition, bidding-period returns on overvalued acquirers are higher than those on similarly overvalued non-acquirers. Being an overvalued acquirer is not associated with executive compensation structure or ownership, suggesting that these acquisitions are less likely to be driven by managers’ private incentives. The results suggest overall that managers engage in acquisitions to boost profitability when their private information predicts diminishing profitability rather than to take advantage of overvaluation and that such acquisitions benefit shareholders.
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