Date of Degree

9-2020

Document Type

Dissertation

Degree Name

Ph.D.

Program

Business

Advisor

Armen Hovakimian

Committee Members

Lin Peng

Jun Wang

Karl Lang

Subject Categories

Corporate Finance

Keywords

Capital Structure, Debt, Cash Holding

Abstract

Chapter 1: This chapter examines variations in corporate debt features with respect to changes in macroeconomic and microeconomic conditions. The features seen in corporate debt issues have evolved substantially over the past four decades in response to changes in the corporate financing landscape. In particular, this chapter studies the evolution of active debt provisions such as fixed-price calls, make-whole calls, and callable conversion features in corporate bond contracts. By integrating corporate bond data from the Mergent Fixed Income Securities Database (FISD) and Securities Data Company (SDC), This chapter reveals new temporal and cross-sectional patterns in active debt provisions.

Chapter 2: This chapter studies how corporate debt features impact firms' financing choices. Deleveraging by reducing debt is costly to shareholders in terms of the value transferred to debtholders and is especially costly in the presence of long-term debt and when the need to deleverage is high. This chapter provides empirical evidence consistent with this point of view, and then shows that having fixed-price callable debt helps firms to limit the value transferred from shareholders to debt holders, thereby mitigating the debt-overhang problem and reducing deleveraging costs. Make-whole calls, however, induce no such effects on the speed of a firm’s adjustment toward its optimal debt ratio, supporting the notion of a wealth transfer mechanism. Consistent with the hypothesis that longer-term debt increases deleveraging risk while callability mitigates that risk, firms with longer maturity debt tend to exhibit higher stock returns, but less so in the presence of callable debt.

Chapter 3: This chapter researches how firms’ capital structures and debt features affect their cash holdings. Prior studies have found strongly negative correlations between firms’ cash holdings and leverage. Various explanations of this relationship have been offered, but they hardly converge. To reconcile discrepancies, I empirically test the validity of the hypotheses on liquidity and non-liquidity motives. Moreover, I propose a new wealth-transfer mechanism that contributes to the negative effect of firms’ capital structure on their cash holdings. Debt features (i.e., fixed-price calls) limit wealth transfer from shareholders to debtholders and enable firms to hold more cash at lower costs. Implementing economic recession as a plausible shock, my results are robust to cash–leverage sensitivities. Overall, I find evidence supporting both liquidity and non-liquidity motives in firms’ cash-holding policies. My empirical results agree with explanations including transaction costs, precautionary measures, strategic actions, and wealth-transfer mechanisms.

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