Dissertations, Theses, and Capstone Projects

Date of Degree

6-2024

Document Type

Dissertation

Degree Name

Ph.D.

Program

Business

Advisor

Linda Allen

Committee Members

Armen Hovakimian

Youngmin Choi

Lin Peng

Subject Categories

Finance and Financial Management

Keywords

Corporate finance, Capital Structure, Financial intermediation, Debt security design, Behavioral finance

Abstract

This dissertation provides an investigation into how external factors influence corporate financing decisions and examines the nature and extent of their impact. To address this, I explore three key external factors: the financial market, financial institutions, and regulatory environment. The chapters explore how the financial market risk perception, financial institutions, and regulatory environment affect corporate financing decisions such as capital structure, bank borrowing, and regulatory capital issuance.

Chapter 1. This chapter presents the motivation and structure of the dissertation.

Chapter 2. Using a recently developed measure of financial market risk perceptions, I show that risk perceptions affect firm-level corporate financing behavior. Firms tend to adjust their capital structures to cater to investors’ appetite for risk. When perceived risks are low, firms tend to choose more leveraged capital structures to take advantage of higher valuations associated with higher risk exposure. When perceived risks are high, firms tend to deleverage to avoid undervaluation associated with higher risk exposure. Furthermore, in periods of low risk perceptions, bond issue announcement returns tend to be higher, whereas long-run returns tend to decline with leverage.

Chapter 3. I document evidence of a potential pitfall of syndicated bank lending that emerges from the aggressive exercise of lines of credit by nonviable zombie firms. Consistent with a nuanced version of Hu and Varas (Journal of Finance 2021) theory, privately informed relationship banks enable zombie firms to build a facade of creditworthiness by allowing aggressive usage of credit lines and restricting amendments that would otherwise signal technical default. After the reputation-building stage, banks exit these loans by shifting credit risk to non-bank participants in term syndicated bank loans, rather than publicly traded bonds, with the exception of the COVID-19 pandemic period.

Chapter 4. Using hand-collected data (across 27 countries) on all contingent convertible capital bonds (CoCos) issued during 2009-2021, I identify a shift in design toward non-dilutive instruments with low CoCo trigger levels that specify positive wealth transfers from bondholders to stockholders upon bank failure, thereby transforming CoCos from TLACs (Total Loss Absorbing Capacity) to ELACs (Equity-protecting Loss Absorbing Capacity). If Credit Suisse’s CoCos had not had ELACs, shareholder payoffs from the March 2023 failure would have declined 36.5%. Abnormal announcement returns for CoCos with ELACs are positive, reflecting ELACs’ extreme loss mitigation for stockholders at the expense of debt holders. Systemic risk-reducing, dilutive CoCos without ELACs are more prevalent in common and French-civil law countries and have significantly negative announcement returns, reflecting a costly managerial commitment to recapitalize troubled banks. Banks issuing CoCos without ELACs overperform during periods of high aggregate uncertainty.

Chapter 5. This chapter concludes the dissertation.

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