Four Essays in Corporate Investment Decisions

Abstract

This thesis consists of four standalone studies on corporate investment decisions. The first study examines the effect of financial analysts on corporate investment decisions. We show that greater analyst coverage leads to higher total factor productivity within firms. Further analysis shows that the positive effect emanates from their critical role in information distribution and external monitoring within financially constrained firms and firms with weaker investor protection. The second study studies the impact of promotion-based tournament incentives on corporate acquisition performance. Measuring tournament incentives as the pay gap between the CEO and other senior executives, we show that acquirers with greater tournament incentives experience lower announcement returns. Further analysis shows that the negative effect is driven by the risk-seeking behavior of senior executives induced by tournament incentives. The third study focuses on the effect of shareholder litigation rights on acquisition decisions using an experimental design that exploits the reduction in litigation threat generated by a U.S. Ninth Circuit Court of Appeals’ ruling. We find that firms in the Ninth Circuit states acquire larger targets and that acquirer returns are lower after the ruling. Our findings imply that the threat of shareholder litigation significantly reduces managers’ incentives to make self-serving acquisitions. The fourth study investigates the role probability of information-based trading (PIN) plays in mergers and acquisitions. We show that acquirers with higher PINs use more cash to finance their deals due to their higher cost of equity, and acquirers use more equity financing when acquiring targets with higher PINs to share the information risk with the target shareholders. We further show that acquirers and targets with higher PINs both experience higher announcement returns when cash financing is used indicating that PIN is priced in the M&A market.