Essays in corporate finance and investments
type: CreativeWork
description: This dissertation studies the interplay of asset and liability sides of balance sheets, and considers both the level and the risk attributions of investments and financing sources. The first chapter links financing frictions on the liability side to investment risk on the asset side. It studies the effect of financial constraints on equity holders' risk-shifting incentives within a real options framework. Within this framework, shareholders trade off the benefit of risk-shifting with the cost of financial constraints. Therefore risk-shifting is avoided ex post for highly constrained firms because the cost outweighs the benefit. In fact, both the risk-shifting incentive and the agency cost of risk-shifting are monotonically decreasing in financial constraints costs. In addition, the effect of debt maturity is also examined in this framework, and without financial constraints, there is no short-term debt effect. These model implications are supported in a large sample of firms over the 1965 to 2009 period: (1) financial constraints help to reduce risk-shifting incentives; (2) complementing the current view, financially unconstrained firms tend to shift risk even when they are still healthy; (3) short-term debt helps to strengthen the effect of financial constraints on reducing risk-shifting incentives; (4) the agency cost of risk-shifting is smaller for more constrained firms. The results are robust to the availability of internal financings. The second chapter studies the opposite direction: the effect goes from the asset side to the liability side. It studies corporate investment and financing in a dynamic trade-off model with a sequence of irreversible investments. Conditional on future investment and financing opportunities, juvenile firms underutilize debt when financing investment the first time to retain financial flexibility. Underutilization of debt persists when adolescent firms mature (i.e. exercise their last investment options), and it is more (less) seve…
abstract: This dissertation studies the interplay of asset and liability sides of balance sheets, and considers both the level and the risk attributions of investments and financing sources. The first chapter links financing frictions on the liability side to investment risk on the asset side. It studies the effect of financial constraints on equity holders' risk-shifting incentives within a real options framework. Within this framework, shareholders trade off the benefit of risk-shifting with the cost of financial constraints. Therefore risk-shifting is avoided ex post for highly constrained firms because the cost outweighs the benefit. In fact, both the risk-shifting incentive and the agency cost of risk-shifting are monotonically decreasing in financial constraints costs. In addition, the effect of debt maturity is also examined in this framework, and without financial constraints, there is no short-term debt effect. These model implications are supported in a large sample of firms over the 1965 to 2009 period: (1) financial constraints help to reduce risk-shifting incentives; (2) complementing the current view, financially unconstrained firms tend to shift risk even when they are still healthy; (3) short-term debt helps to strengthen the effect of financial constraints on reducing risk-shifting incentives; (4) the agency cost of risk-shifting is smaller for more constrained firms. The results are robust to the availability of internal financings. The second chapter studies the opposite direction: the effect goes from the asset side to the liability side. It studies corporate investment and financing in a dynamic trade-off model with a sequence of irreversible investments. Conditional on future investment and financing opportunities, juvenile firms underutilize debt when financing investment the first time to retain financial flexibility. Underutilization of debt persists when adolescent firms mature (i.e. exercise their last investment options), and it is more (less) seve…
author: Sun, Dongming
language: en
keywords: Financial Constraints, Risk Shifting, Asset Substitution, Real Options, Capital Structure, Financial Flexibility, Idiosyncratic Risk, Implied Volatility, Stock Returns.
date published: 2012-09-18T21:19:40Z
date modified: 2026-07-22T22:25:31Z
provider: University of Illinois - Urbana-Champaign
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: University of Illinois at Urbana-Champaign

PropertyValue
property ID: Handle
value: http://hdl.handle.net/2142/34492