Three essays on corporate finance

• Main Author: Yao, Jiaquan
• Other Authors: Chang Xin
• Format: Theses and Dissertations
• Language: English
• Published: 2014
• Subjects: DRNTU::Business::Finance::Corporate finance
• Online Access: http://hdl.handle.net/10356/58903
• Institution: Nanyang Technological University

This dissertation contains three essays on corporate finance. Essay One decomposes cash flow into a temporary and a permanent component, and show that the temporary component has little information content about future growth opportunities. We then study how firms allocate cash flow by estimating the cash flow sensitivities of various uses of cash flow with respect to the temporary component. We demonstrate several methodological advantages of our approach to alternative GMM methods. A key finding is that financially more constrained firms show significantly a lower sensitivity of investment, but a higher sensitivity of change in cash holdings, to the temporary component of cash flow than financially less constrained firms. Essay Two models the impact of firm misvaluation on the allocation of internal cash flow across its various uses, including investment, cash holdings, and financing activities. Our model predicts that when firms are undervalued, they allocate additional cash flow towards investment and cash holdings, away from substituting costly external finance. Conversely, when overvalued, firms shift additional cash flow from investment and cash holdings to reductions in external financing. Our empirical results confirm these predictions. Furthermore, consistent with the premise that debt is less mispriced than equity, firms reduce more equity than debt using additional cash flows as they become more overvalued. Taken together, our results imply that (1) overvaluation (undervaluation) alleviates (exacerbates) financial constraints; (2) firms dampen the effects of misvaluation on corporate policies via altering the allocation of internal cash flow across different uses. Essay Three examines the information role of financial advisors by focusing on mergers and acquisitions in which acquiring firms hire target firms’ ex-advisors. We document that by employing targets’ ex-advisors, acquirers pay lower takeover premiums and secure a larger proportion of merger synergies. The corresponding targets exhibit lower announcement returns and are less likely to be propositioned by competing bidders. These results indicate that acquiring firms access and exploit value-relevant information about target firms through targets’ ex-advisors, and achieve a bargaining advantage in deal negotiations. In contrast, when targets hire acquirers’ ex-advisors, there are no discernible value effects on either firm, consistent with targets’ weak ability to use the promise of future business to engage acquirers’ ex-advisors.