Luis Garcia Feijóo
Published: 2001
Total Pages: 250
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The first essay, "Why do firms issue convertible securities? New evidence on sequential financing" investigates the sequential-financing hypothesis on the use of convertible securities (Schultz, 1993a; Mayers, 1998). Examination of conversion-forcing calls of warrants reveals significant increases in investment and financing activity for the calling firms around the time of the call. While evidence of investment and financing increases subsequent to the call is consistent with the hypothesis, there is also evidence of increases prior to the call. Furthermore, the call signals a subsequent decline in firm performance. Calling firms experience significantly higher sales growth than industry medians prior to year of the call but become indistinguishable from them subsequent to the call. Similar findings have been reported for calls of convertible debt. Multivariate analysis does not provide evidence that investment growth in the year of the call is related to existing investment opportunities, controlling for call proceeds. Overall, our findings raise questions on the validity of the sequential-financing hypothesis. The second essay, "Corporate investment, market value, and book-to-market: An empirical investigation," examines the association between market value, book-to-market (B/M), and corporate investment. Firms assigned to big and low-B/M (B/L) portfolios significantly increase investment prior to the portfolio formation year. Their market values rise and their leverage levels diminish. Small and high-B/M (S/H) firms reduce investment and increase their market leverage. When we form portfolios based on investment growth (i.e., exercise of investment opportunities), average returns are significantly lower for high investment stocks. Within investment growth groups, there is weak evidence of a value premium. Furthermore, corporate investment growth is highly significant in cross-sectional and time-series regressions and contains information similar to that of B/M. This evidence is consistent with the model of Berk, Green, and Naik (1999), who relate exercise of growth options to firm-specific fundamentals and observed returns.