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ABSTRACT: Firms have many risk management tools at their disposal. How a firm uses these choices alone and as part of a choice set is less well understood. I examine two major risk management decisions in the corporate finance arena. First, I address the use of operational hedging (corporate finance activity that reduces firm risk). I document that acquisitions are operational hedges and that firms substitute operational and financial hedging. Next, I explore the speed of capital structure adjustment. Capital structure decisions are an important part of risk management and I document that the costs and benefits of adjustment are significant factors in determining leverage. Collectively, my research presents new information on how firms use two major risk management tools: operational hedges and capital structure adjustment.
Abstract: This dissertation analyzes restatements of financial statements and the use of cross-listed stock by foreign firms in acquisitions of U.S. firms. The first essay examines the components of the CEO's compensation: stock options, equity holdings, restricted stock and long-term incentive plans (LTIP) and their relation to misreporting. A unique feature of options is that it allows executives to benefit if the stock price increases, while mitigating their loss if the stock price decreases. This essay shows that incentives from option compensation are positively associated with misreporting. An increase in the equity and restricted stock component of compensation has no impact on incentives to engage in such risky accounting. The use of long-term incentive plans and restricted stock do not extend a manager2s horizon relative to the short-term focus induced by options. Finally, we examine the market reaction to the announcement of a restatement. It is more negative for those restating firms in which the exercise of options was greater during the misreported period, providing support for the idea that options provide a 1camouflage2 for insider trading. The second essay examines the role of cross-listed stock in foreign acquisitions of U.S. firms. By cross-listing, a foreign firm reduces its cost of an acquisition made with equity by enhancing the rights of its minority investors and by decreasing barriers to ownership of its shares by U.S. investors. Cross-listed firms using equity to finance an acquisition pay less than non cross-listed firms paying with cash. Despite this benefit, cross-listed firms use equity less often than U.S. firms. Cross-listed firms from countries with poorer investor protection use equity less often than those from countries with greater investor protection. Moreover, they pay a higher premium when using equity. We find evidence supporting Hansen's (1987) risk-sharing hypothesis that using equity in an acquisition enables the bidder to share the risk with the target that the bidder overpaid, as the target is forced to share in any post acquisition revaluation effects. Finally, we find that while non-cross-listed firms use favorable exchange rate movements to bid more aggressively, cross-listed firms do not.
This thesis presents two essays that link firm behavior to constraints they face while raising capital in external markets. The first. essay features a theoretical model that establishes the importance of speculative motive and firm borrowing capacity, as reflected by asset tangibility, on cash management decisions of financially-constrained firms. The study concludes that for constrained firms, cash varies positively with asset intangibility and likelihood of future profitable investment, and negatively with future cash flows; while these relationships are imperceptible for unconstrained firms. The model further introduces a risk-averse firm owner and proves that ceteris paribus, with an increase in his degree of risk aversion, the owners investment choice conforms with theory and he invests in a profitable project with certain payoff over a higher-yielding but uncertain future project. This essay is the first study to investigate the effects of future stochastic investment opportunity, asset tangibility and risk aversion exclusively on rash holdings of constrained firms.
This dissertation seeks to understand the effect of information asymmetries on corporate liquidity choices and efficiency of bankruptcy resolution, and the role of pooling and reputational concerns on an originator's incentives to invest in signal precision. The first chapter identifies and provides a causal estimate of the economic importance of information asymmetries between corporate insiders and outsiders in equity markets on small public firms decision to hoard liquid assets. The second chapter develops a theory of securitization in which the originator's incentives to screen are endogenized and affected by reputational concerns to investigate the effect of the pooling of assets on screening and systematic risk. In the third chapter, we investigate the impact of relative bargaining power of firms over creditors during bankruptcy on ex-post firm performance, once the firm emerges out of bankruptcy. Although existing theories predict a causal link between firm opaqueness and firm cash holdings, endogenous and coarse measures of opaqueness hinder the identification of this link. Using the discontinuous requirement of financial reporting introduced by Sarbanes-Oxley Act, Section 404, we estimate the causal effect of opaqueness on cash holdings. We show that firms that comply with Section 404 and provide more reliable information exhibit lower cash holdings compared to observationally similar firms. Further, compliant firms that hold less cash exhibit higher R & D expenditures relative to non-compliant firms. This difference sheds light on the opportunity costs of holding cash. In the second chapter, we develop a theory of securitization in which the securitization of large asset pools leads to a reduction in idiosyncratic risk but an increase in systematic risk, and the originate-to-distribute model of securitization is not sufficient for this result. The model is one in which the originator's screening incentives are endogenized, and screening and pooling of loans in securitization have both idiosyncratic and systematic risk consequences. The originator's screening incentives are affected by career concerns as well as by the impact of screening on the risk of the securitized portfolio. The effect of securitization on idiosyncratic risk and systematic risk occurs via a dilution of the originator's screening incentives, with greater dilution occurring as more loans are added to the pool being securitized. Further, when we endogenize the information acquisition incentives of the investors who purchase securitized claims, we find that there is an interaction between these incentives and the screening incentives of originators. A weakening of the issuer's screening incentives leads to weaker incentives for investors to become informed and a higher valuation uncertainty, creating a feedback effect that further weakens the issuer's screening incentives. In the third chapter of my thesis evaluates the impact of bargaining between management and creditors on bankruptcy outcome and ex-post efficiency of bankruptcy resolution. We find that firms in which creditors (management) exerts greater (lower) influence in the negotiation process are more likely to be liquidated. Increase in power of creditors during the bankruptcy negotiations is associated with lower likelihood of re-filing and superior post-bankruptcy profitability among firms that emerge. However such ex-post efficiency gains come at a cost as increase in power of creditors also leads to a lengthier bankruptcy. The unique aspect of our analysis is our ability to correct for the selection bias engendered by our focus on firms that emerge out of bankruptcy using the Bankruptcy Abuse Prevention and Consumer Protection Act (BACPA) passed in 2005 as an exogenous shock to the likelihood of liquidation. Collectively, our results lend credence to the idea of allocating greater power to creditors in bankruptcy proceedings.
With her work, Irène Kilubi builds a bridge between two areas of business research, on the one hand the supply chain management, and on the other hand innovation and technology management. In the context of her work, she proposes to expand the usual instruments of supply chain risk management by strategic technology partnerships, which not only provide procurement alternatives but also the possibility to develop technological alternatives at short notice. More precisely, she advocates that the capabilities needed for STP serve as enablers for effective SCRM. Accordingly, connections between supply chain risk management and strategic technology partnering are presented and a conceptual framework is correspondingly created.
The point of departure for this book is the fundamental assertion that managers of international enterprises must cope not only with the hazards that jeopardize the success of ordinary domestic transactions but also with additional perils that are uniquely international. Two of the most important of these are the risk of a breakdown in the rules and practices that govern international trade and investment flows, and country risk - the risk that a sovereign power will interfere with the repatriation of profits, interest payments, principal repayments, or the control of foreign assets. The issues addressed include the prospects for foreign exchange crises, trade wars, international banking crises, and oil shortages; the factors that generate economic, political, and social risk; organizational strategies for mitigating country risk; and the scope for insuring against international risks. The contributors include academic experts from the fields of economics and finance and distinguished practitioners from international corporations, financial institutions, and international agencies.