Three essays on corporate finance

• Main Author: Choi, Changhwan
• Other Authors: [Supervisor not in the list]
• Format: Thesis-Doctor of Philosophy
• Language: English
• Published: Nanyang Technological University 2019
• Subjects: DRNTU::Business::Finance::Corporate finance
• Online Access: https://hdl.handle.net/10356/104141; http://hdl.handle.net/10220/47798
• Institution: Nanyang Technological University

This thesis consists of three essays on corporate finance. Essay one investigates whether cyber risk, which is an emerging threat to many firms, affects firms’ cost of debt. We find that bank loan spreads increase by an average of 36 basis points in the three years following a breach. This economically significant increase in loan spreads is more evident when breaches result in the loss of financial information or when the stock market’s response to such incidents is negative, suggesting that banks take the magnitude of the adverse impacts of breaches on firms into account when pricing. The increase in loan spreads is also more pronounced when attacked firms are informationally more opaque, when they have poorer corporate governance, and when their managers have greater risk-shifting incentives. Thus, banks also consider breached firms’ information environment and managerial incentives when reassessing loan pricing. Durable lending relationships prior to breaches mitigate the adverse impact of breaches on loan rates. We further find that breached firms replace short-term bank borrowing with long-term bonds after an incident, suggesting that they attempt to avoid frequent debt rollovers. In Essay two, I investigate the impact of corporate income taxes on executive compensation. Using staggered changes in corporate income tax rates across U.S. states, I find that the sensitivities of executives’ wealth to stock return (delta) and the sensitivities of executives’ wealth to return volatility (vega) increase as the state tax increases. I also find that, after the taxes increase, managers receive more equity-intensive compensation. The tax impact on delta and vega is more pronounced with the executive’s myopic characteristics and better corporate governance. Finally, I show that the adverse effect of taxes on firm risk tend to be mitigated after managers experience their delta and vega increases. Taken together, shareholders factor corporate income taxes into managerial compensation contracts. Essay three investigates whether the introduction of equity options influences the cost of bank debt. I use the listing of exchange-traded equity options and examine the effect of option listing on the cost of bank debt. I find a significant decline in loan spreads after a firm is listed in option exchange. The declining effect is more pronounced for informationally opaque firms. I also find that listed firms receive better credit rating after listing. The results suggest that options improve the informational environment and reduce monitoring costs and credit risk faced by banks, in turn, reduce the cost of debt for the borrower.