Three Essays on Leverage and Debt Contracts
Three Essays on Leverage and Debt Contracts

Author: Hugh Marble

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Published: 2007

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ABSTRACT: My studies considered three things: (1) the choice between non-recourse secured debt and recourse debt (unsecured debt or secured debt with recourse) by firms that are sequentially acquiring assets and then making investment choices once those assets have been acquired, (2) how secured debt financing impacts both the asset substitution and underinvestment problems, and (3) the frequency with which credit rating changes result from changes in the firm's operating environment versus changes in capital structure controlled by management. First, non-recourse secured debt is shown to be optimal for firms engaged in the acquisition of assets which have little need for non-contractible ongoing investment. Unsecured debt provides superior post-acquisition incentives for owners of assets that require ongoing investment or that can be easily modified. Empirical tests using Real Estate Investment Trusts provide evidence supporting the model and consistent with previous work. Second, the underinvestment problem does not depend on the proportion of the original debt that is secured and the asset substitution problem decreases in the proportion of the original debt that is secured. Debt capacity increases with the proportion of debt that is secured as the asset substitution problem is lower for a given level of debt. An analysis of a large sample of firms with COMPUSTAT data supports the model predictions. Third, I found that management action plays a significant role in credit rating changes. Twenty-four percent of downgrades and 41% of upgrades have a substantial management influence. The frequency of management impact on credit ratings shows the limitations of credit risk modeling using structural models that assume constant capital structure.

Three Essays on Capital Structures Determinants
Three Essays on Capital Structures Determinants

Author: Hosein Maleki

Publisher:

Published: 2016

Total Pages: 175

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The first essay studies the influence of credit ratings on the time-series evolution of corporate capital structures. We show that better rated firms have significantly more stable leverage ratios over time. By comparing firms across the investment-grade cut-off, we conclude using treatment effects estimation, that assignment to more stable rating classes leads to more stable capital structures over time. Extending this study across the whole range of ratings, we show that a one standard deviation improvement in credit-rating quality can reduce the leverage hazard ratio by more than 70%. In alternative investigations, rated firms tend to have largely more stable leverage ratios compared to not-rated firms. Matching firms based on their propensity to have credit ratings, rated firms take between 1.5 and 9 years longer to change their leverage ratios to the same levels as their not-rated counterparts. Our results are robust to the choice of different time frames and variety of controls. They extend the literature of the effects of credit ratings on capital structures by highlighting the importance of credit ratings on the long-run financing behaviors of firms. The second essay studies the stability of various debt-structure dimensions. Survival and long-run clustering analyses are used to assess the stability of debt-rank orderings, debt heterogeneity and main debt type(s). Firms only maintain stability in their main debt type, while frequently changing the weights and priorities of other debt types, heterogeneity indexes and rank orderings. While all debt structure metrics are less stable with the assignment of a credit rating, the effect on the stability of the main debt type is minor. Firms with higher tax rates, market leverages and cash flow volatilities exhibit higher stability in their debt structures. The final essay investigates how the optimal corporate debt maturity is influenced by the strength of creditor rights and the efficiencies of contract enforcement mechanisms. Using a correlated random effects specification, we find that across 42 countries stronger creditor rights are associated with shorter corporate debt maturities while greater contract enforcement leads to longer maturities. These empirical results are consistent with the differing effects of creditor rights and contract enforcement on the choice of corporate maturity predicted by our model. Our results are robust to using different measures of debt maturity, individual components of creditor rights and different measures of contract enforcement. Our results are mostly driven by developed country debt and hold with the inclusion of various controls.

Three Essays in Dynamic Corporate Finance
Three Essays in Dynamic Corporate Finance

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The three essays constituting this thesis focus on financing and cash management policy. The first essay aims to shed light on why firms issue debt so conservatively. In particular, it examines the effects of shareholder and creditor protection on capital structure choices. It starts by building a contingent claims model where financing policy results from a trade-off between tax benefits, contracting costs and agency costs. In this setup, controlling shareholders can divert part of the firms' cash ows as private benefits at the expense of minority share- holders. In addition, shareholders as a class can behave strategically at the time of default leading to deviations from the absolute priority rule. The analysis demonstrates that investor protection is a first order determinant of firms' financing choices and that conflicts of interests between firm claimholders may help explain the level and cross-sectional variation of observed leverage ratios. The second essay focuses on the practical relevance of agency conflicts. De- spite the theoretical development of the literature on agency conflicts and firm policy choices, the magnitude of manager-shareholder conflicts is still an open question. This essay proposes a methodology for quantifying these agency conflicts. To do so, it examines the impact of managerial entrenchment on corporate financing decisions. It builds a dynamic contingent claims model in which managers do not act in the best interest of shareholders, but rather pursue private benefits at the expense of shareholders. Managers have discretion over financing and dividend policies. However, shareholders can remove the manager at a cost. The analysis demonstrates that entrenched managers restructure less frequently and issue less debt than optimal for shareholders. I take the model to the data and use observed financing choices to provide firm-specific estimates of the degree of managerial entrenchment. Using structural econometrics, I find costs of contro.

Three Essays on Reputation, Household Debt, and Monetary Policy
Three Essays on Reputation, Household Debt, and Monetary Policy

Author: Clodomiro F. Ferreira Mayorga

Publisher:

Published: 2016

Total Pages: 189

ISBN-13:

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This dissertation is composed of three separate and self-contained chapters on two different areas: (i) reputation building and competition in on-line markets, and (ii) the heterogeneous transmission of monetary policy to household consumption expenditures and income. The first chapter investigates how sellers' strategic competition for high valuation buyers shapes reputation building incentives in a setting resembling an on-line market, and how it determines the dynamics of prices and reputation itself. Sellers repeatedly auction off a good to a pool of short-lived buyers; efforts and valuations are private information. Ceteris paribus, as the reputation of competitors increase (intensity of competition), a seller's incentive to exert effort that helps to successfully complete a transaction decrease. This "intensity" of competition effect, however, quickly disappears as the number of buyers in the market increases, providing a motivation for the use of equilibrium concepts such as "oblivious equilibrium", in which the only payoff relevant reputation is the average one. The second chapter shifts focus to household expenditure, debt and monetary policy. It is shown that, in response to an interest rate change, mortgagors (i.e. households that own a house with a mortgage) in the U.K. and U.S. adjust their spending significantly (especially on durable goods) but outright home-owners (i.e. households that own a house outright) do not. While the dollar change in mortgage payments is nearly three times larger in the U.K. than in the U.S., these magnitudes are much smaller than the overall change in expenditure. In contrast, the income change is sizable and similar across both household groups and countries. Consistent with the predictions of a simple heterogeneous agents model with credit-constrained households and multi-period fixed-rate debt contracts, our evidence suggests that the general equilibrium effect of monetary policy on income is quantitatively more important than the direct effect on cash-flows. Finally, the third chapter exploits individual mortgage data in the UK to try to further understand the role of mortgagor's balance sheets in the transmission of monetary policy. Estimation results point in the direction of significant heterogeneity in two dimensions: (i) in the response of observed leverage (loan-to-value) and affordability (loan-to-income) ratios at the time of origination for the median mortgagor, and (ii) the response of LTVs for households that are first-time-buyers and those that are non-first-time-buyers.

Three Essays on Earnings Management, Financial Irregularities, and Capital Structure
Three Essays on Earnings Management, Financial Irregularities, and Capital Structure

Author: Raunaq Sushil Pungaliya

Publisher:

Published: 2010

Total Pages: 150

ISBN-13:

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If firms adjust their actual leverage toward this target leverage over time, then rational investors should consider both current and target leverage in pricing contracts whose value depends on the firm's default risk. Using a large sample of corporate bonds and credit default swap (CDS) contracts during 2000 to 2007, we document evidence consistent with this prediction. In particular, target leverage is both an economically and statistically significant determinant of bond and CDS spreads, and its role increases with contract maturity. Credit ratings also reflect the effect of target leverage, which suggests that the credit rating agencies rate firms as if their capital structure decisions are consistent with the tradeoff theory. In the third and final essay, I examine how the disclosure of fraudulent reporting affects bondholder wealth, credit ratings, and contract features of new bond issues. I find that fraud announcements trigger swift, sharp, and long lasting credit rating downgrades and are associated with significant declines in bondholder wealth. An examination of new bond issues confirms a significant increase in both the yield spread and the gross spread charged by the investment bank compared to pre-fraud levels. Moreover, a significant proportion of bonds issued after a fraud contain call provisions that are more expensive in the short run but may be potentially value maximizing in the long run if credit conditions improve. Thus, I argue that managers are optimistic that the increase in the cost of debt induced by the fraud is temporary. However, contrary to managers' optimistic beliefs, I find that corporate credit ratings, once decreased, remain significantly depressed for at least three years following the fraud announcement.