Essays in Corporate Finance: Information Asymmetry, Financial Constraints and Corporate Decision Making

Abstract

This thesis consists of three standalone studies investigating factors that affect firms’ information environment and financing capacity. The first study examines the impact of social connections between a firm’s executives and directors and brokerages that follow the firm on the firm’s cost of equity. We document strong evidence that firm-brokerage social connections decrease the firm’s cost of equity. We use quasi-natural experiments to address endogeneity concerns and find that the uncovered effect of firm-brokerage social connections on cost of equity is likely causal. The effect is found to be more pronounced for firms with more soft information, opaque information environments, tight financial constraints, weak corporate monitoring, or high executive equity ownership. Further, consistent with the evidence on cost of equity, we find that firm-brokerage social connections reduce SEO under-pricing, decrease information asymmetry in stock markets, and improve the firm’s equity valuation. The second study examines the growing trend of cross-industry CFO turnover and how this trend impacts financial reporting quality. This study shows that cross-industry CFO turnover has grown markedly over the past three decades and, more importantly, that out-of-industry learning opportunities, as proxied by cross-industry CFO turnover network centrality, significantly improve corporate financial reporting quality. The impact of out-of-industry learning opportunities on financial reporting quality is found to be more pronounced for young, growing firms, for industries undergoing significant economic disruptions, and for firms that have hired an out-of-industry CFO in the recent past. Our findings are robust to using alternative financial reporting quality measures and various approaches to addressing endogeneity concerns, suggesting that the positive effect of cross-industry CFO turnover network centrality on financial reporting quality is likely causal. Furthermore, consistent with the evidence on financial reporting quality, greater cross-industry CFO turnover network centrality is found to lower the likelihood that the internal control system is identified by independent auditors as weak and decrease the level of informational problem perceived by the investors in capital markets. This paper studies the real impacts of real estate market shocks occasioned by real estate investment trust (REIT) bankruptcies on shareholder value, bondholder value, and corporate policies of local firms. We find REIT bankruptcies to significantly reduce local real estate prices by 0.4% per quarter on average for the next eight quarters subsequent to the filings. Our evidence shows that real estate shocks occasioned by REIT bankruptcies decrease local firms’ shareholder value and bondholder value, particularly for firms with have large real estate holdings and are in difficult financial positions or rely heavily on debt financing. Moreover, REIT bankruptcies decrease local firms’ long-run shareholder value particularly for firms that have large real estate holdings and are in difficult financial positions or rely heavily on debt financing. We further document significant and likely causal impacts on local firms’ financial, cash-holding, investment and payout policies, bank loan contract terms, bond value, and volatilities. The findings highlight the real effects of real estate shocks.