Essays on Market Conditions and Corporate Investment Decisions

This thesis investigates how market conditions -- different beliefs about firm value, the business cycle, and financial regulations -- affect corporate investment decisions in firms, and the impact of these decisions on corporate performance. In Chapter 1, I document evidence that belief dispersion affects corporate investment allocation. When investors disagree with each other on expectations about future project returns, firms allocate a larger share of total investment in riskier projects (for example, R and M), in order to exploit the disagreement, and they allocate less in physical capital investment. This effect becomes amplified when firms experience a positive return shock to CAPX, when more investment in CAPX would be expected. To establish causality, I use mergers between brokerage houses to provide a source of exogenous shocks to belief dispersion. Chapter 2, written jointly with Mohammad Rahaman, uses economic recessions as settings for `creative destruction' and examines the efficiency of pro-cyclical capital reallocation through the corporate-control market. It shows that the efficacy of M investment activities varies with time and in intensity, as firms that concentrate most of their M activities in the good times are more likely to exit inefficiently in a subsequent recession. The results suggest that firms misallocate capital through excessive M\ during expansions, thus becoming more vulnerable when there is a negative aggregate shock. Chapter 3, written jointly with Varouj Aivazian and Mohammad Rahaman, provides cross-country evidence to show that adverse financial shocks to firms can be attenuated through regulations. Episodes of systemic banking crises across many countries are examined to identify unanticipated credit contractions; firm investment growth during and post crisis periods are compared to their pre-crisis levels. The chapter shows that credit contractions are costly for firms, and that they are more costly for firms that are more reliant on the external capital market. It is also shown that declines in investment growth are greater for externally dependent firms if such firms are embedded in ex-ante ``repressively" regulated financial markets. The results suggest that specific financial reforms play a significant role in attenuating the propagation of a banking crisis to the real sector.

Department dc:contributor.department

Economics

Year dc:date.issued

2015

Author dc:creator

• Ding, Ding

Advisors dc:contributor.advisor

• Zhu, Xiaodong
• Aivazian, Varouj A

• Corporate Fiannce
• Corporate Investment
• Financial Regulations
• Investment Allocation
• Investor Belief Dispersion
• M

Handle dc:identifier.uri

http://hdl.handle.net/1807/69014

OAI identifier oai:identifier

oai:utoronto.scholaris.ca:1807/69014