acase@tulane.edu

This thesis consists of three empirical essays examining a variety of topics in corporate finance and investments. The first work argues that corporate diversification mitigates credit constraints. The second work examines the effects of dual class recapitalizations. The third essay studies the relationship between financial leverage and stock returns. Each essay is a complete work in and of itself In the first essay, we condition on the business cycle and use models from the monetary policy transmission literature to examine whether focused firms are more credit constrained than diversified rivals due to higher agency costs of borrowing. We find that during recessions, industry-adjusted growth rates in sales drop more for bank-dependent focused firms than for bank-dependent diversified firms. Consistent with a credit constraints explanation, the results do not hold for firms that are not bank-dependent. Overall, bank-dependent focused firms appear to be more credit constrained in recessions The second essay presents several findings that do not support the hypothesis that dual class structures are harmful to shareholders. The 178 firms adopting dual class structures during 1979--1998, on average, earn significant positive abnormal stock returns of 18.17% in a period of 48 months following the announcement month. Furthermore, we find that firms whose managers are more likely to be adopting a second class of stock for control purposes experience an even larger abnormal stock return performance of 41.67%. In addition to examining stock returns, we document significant improvement in the operating performance of the sample firms and provide evidence that dual class structures may be used to mitigate certain underinvestment problems within the firm. The third essay examines the relationship between financial leverage and stock returns. Consistent with the pecking order model, we show a significantly negative contemporaneous relationship between changes in financial leverage and risk-adjusted stock returns. We also find that changes in financial leverage are negatively associated with risk-adjusted future returns. The results suggest that changes in financial leverage may be used as an alternative measure for operating performance. However, the market does not fully incorporate the information embedded in changes in financial leverage / acase@tulane.edu

These essays study the effects of corporate governance and social capital on firm characteristics such as firm performance and firm value. The first essay addresses with the relationships between ownership concentration, financial performance, and economic characteristics of Colombian firms. Using panel data for 144 firms that issue securities in the Colombian economy between the years 1995 and 2003, we study the determinants of ownership and accounting performance. We find a strong inverse U-shaped effect of earnings variation on ownership concentration, and a U-shaped effect of earnings variation on accounting performance. Additionally, accounting performance positively affects ownership concentration, and ownership concentration affects accounting performance, although the tendency of its effect is not clear. After controlling for endogeneity, we find that ownership concentration has a nonmonotonic effect on accounting performance, with an initial negative effect and, as the ownership becomes highly concentrated, a positive effect. The second essay is a follow-up of the first essay for a sample of Latin American firms. The essay studies the effects of ownership concentration on the accounting returns for a panel of 532 publicly listed Latin-American firms between the years 1999 and 2003. The firms are from five countries: Colombia, Brazil, Chile, Peru and Venezuela. The third essay presents a theoretical model of cooperation and agency costs focusing in the extent of cooperation among the manager and the investors, an important variable absent in agency cost analyses. Two types of cooperation are studied: (1) generalized cooperation, a behavior close to social capital, a comprehensive concept that characterizes the inclination to cooperate among the individuals of a given society; and (2) discriminating cooperation, a concept close to cooperation with relatives. These types of cooperation affect managerial private benefits differently; while generalized cooperation reduces agency costs, discriminating cooperation may enlarge them, until the manager becomes highly close toward his cooperating investor. The fourth essay presents evidence about the impact of cooperation on firms' characteristics. Social capital has its basis in the social cohesion built across generations. Fragmented societies likely score low in social capital, a deficiency that hinders their development. Moreover, some forms of social capital can have negative consequences: when cooperation is oriented to rent seeking or when it is selective. Some empirical tests associate social capital with economic growth, but there is no evidence of its impact at firm levels. The essay tries to fill that void. With a sample of firms from forty four countries, we find that social capital is positively associated with firm value, and has a U-shaped effect on firm size. Additionally, a form of selective social capital, family cooperation, has a U-shaped effect on firm value and an inverse U-shaped effect on firm size. While the U-shaped effect of social capital on firm size was unexpected, at least the negative slope, all additional effects present the expected theoretical shapes, which are the result of two contrasting forces: the agency cost of managerial private benefits and focused or generalized cooperation. (Abstract shortened by UMI.) / acase@tulane.edu

acase@tulane.edu

This thesis includes three essays which examine different aspects of the relationship between institutions and firms in which they invest taking into consideration objective functions of institutions' managers. First, shareholder-initiated proposals are examined to understand the objectives of institutions that pursue this type of shareholder activism and the role of ownership structure in determining the outcome. We find that a sponsor's identity and a firm's ownership structure are important in determining the outcome of a proposal. Large institutions pressure management not to compromise on value decreasing proposals. Furthermore, sponsors who are perceived to have different objectives from other shareholders receive less voter support Second, this thesis investigates the valuation effects associated with objective functions of institutions' managers by examining how the cross-sectional variation in private and public pension fund ownership affect the cross-sectional variation in relative firm value (industry-adjusted Tobin's Q). Using data for a sample of Fortune 500 firms, we find that relative firm value is positively related to ownership by private pension funds and negatively related to ownership by public funds that publicly target firms Finally, this thesis studies firm performance around potential increases in institutional ownership by examining a sample of firms announcing private placements of equity. We find a negative relation between increases in institutional ownership and market reaction. We also find that investors in the private placement have a positive long-term performance afterward via a discounted purchase price while the firm has a negative long-term performance Taken together, these results suggest that institutional investors are not homogeneous, and their incentives are not necessarily aligned with those of other shareholders. When objective functions of institutions' managers place more importance on performance, incentives are more aligned with wealth maximization. This benefits other shareholders when they are acting as existing shareholders. However, it can be at the expense of existing shareholders when they are acting as new shareholders as in the case of private placements. Less importance on performance, on the other hand, leads to objective functions that can be in conflict with the objective function of shareholders / acase@tulane.edu

This dissertation examines econometric properties of foreign exchange markets under conditions which approximate actual market conditions more closely than studies done in existing literature. This study uses continuous data for spot exchange rates for the months of April, May, and June in 1989 and daily data from 1973 to 1990. The continuous data was obtained from Reuters Ltd from a direct data feed of the Reuters FXFX page. The currencies chosen are the German Mark, the Pound Sterling, and the Japanese Yen, all quoted bilaterally with respect to the U.S. dollar The first chapter of this dissertation discusses the efficient market hypothesis. The second chapter carries out a detailed analysis of the behavior of spot exchange rates by testing for the presence of three, two and one unit roots using various recently developed methodology. It was found that for high frequencies of 30 seconds or one minute the assumption of an unit root was not valid on quite a few occasions. After this, the study uses temporal aggregation to decrease the frequency of the data to see if there is any change in the results with lower frequencies. At lower frequencies, like 5 minutes, 15 minutes, 30 minutes, or one hour, the hypothesis of the presence of unit roots is accepted. Diagnostic tests indicate the presence of heteroskedasticity and high kurtosis in the data at high frequencies. Therefore, the problem of time-varying variance and selection of an appropriate distribution to reduce the kurtosis was dealt with by fitting ARCH and GARCH models to the data Another test of market efficiency is to test whether forward rates are unbiased and efficient estimators of future spot rates. This is carried out using daily, weekly, and monthly data for the Deutschemark, French Franc, and the British Pound against the U.S. Dollar for the period 1977 to 1990. We find that spot and forward rates are cointegrated for daily and weekly data but not for monthly data. Additional coefficient restriction necessary for the unbiasedness hypothesis are not satisfied for any currency; and, therefore, we conclude that the unbiasedness hypothesis does not hold / acase@tulane.edu

acase@tulane.edu

This dissertation analyzes the cross-sectional variation in monthly average stock returns explained by the behavior of fundamental variables such as earnings to price ratio (E/P), book-to-market equity ratio (B/M), and size of market equity series (ME) in the Mexican stock market The Seemingly Unrelated Regression (SUR) model, using methodology similar to that of Chan, Hamao, and Lakonishok (1991), is used first to test the significance of the fundamental variables at the portfolio level, adjusting at the same time for portfolio risk where the betas are estimated simultaneously with the impact of fundamental variables. I find that E/P is the most statistically significant and economically important of the fundamental variables with a positive impact on expected stock returns for the 1989 to 2001 period. The size of the market equity series has a negative risk premium, but size is not significant after the adjustment in the level of prices in the fundamental variables for the 1989 to 2001 period. The B/M variable turns out to be highly dependent of the model and portfolio formation for the significance. The risk premium of B/M changes from positive to negative and several times is not significant for the 1989 to 2001 period The January effect versus the other months in relation to the fundamental variables and stock returns is also analyzed using SUR. I find that E/P is also the fundamental variable that has the largest average risk premium and significant, with a positive relation between expected returns and E/P Finally, a portfolio formation process similar to that of Fama-French (1992), using size-beta portfolios, is applied to study the relationship between fundamental variables, beta and the stock returns using SUR. Beta is previously computed with the monthly value-weighted index obtained from the sample. The sum beta is used for nonsynchronous trading. I find that average stock returns are positively related to market beta, but E/P is additional priced with a positive risk premium in that model with beta and the fundamental variables. E/P and beta are the only variables that are statistically significant for the period of 1989 to 2001 / acase@tulane.edu

How do equity issuing firms and underwriters get together? We develop a theoretical model founded on the idea that issuers and underwriters associate by mutual choice. Underwriters look to the quality of the issuers who may wish to employ their services and issuers look to the abilities of the underwriters they consider employing. Our approach contrasts to the conventional view of one-sided choice established in the existing literature Our model suggests that a rematch will occur for subsequent offerings should changes in firm quality and/or underwriter reputation warrant it. Our empirical finding that firms experiencing a relative reduction in quality from IPO to SEO switch to lower reputation underwriters at the SEO stage provides especially convincing support for this notion We derive new implications about underwriter market share, showing that (a) high reputation underwriters benefit from a more stable revenue stream and (b) that while their market share increases when overall market activity is reduced, this would be accompanied by a relative decrease in the quality of the issues they underwrite In our model, pricing of underwriter services is left to bargaining between the parties after the match between issuers and underwriters is determined. While flat percentage IPO fees are a possible outcome with double-sided matching, high-reputation underwriters make higher dollar revenues by underwriting larger offerings. This is also true for subsequent offerings since high reputation underwriters associate with firms that undertake larger and more frequent security offerings subsequent to their IPO We also find that underwriter reputation is negatively related to the probability to withdraw an offering during the registration period and that on average in adverse market conditions underwriter reputation has a higher negative impact on the probability to withdraw than it has in more favorable market conditions By examining gross spreads over time we find a significant clustering of percentage gross spreads on round numbers. The evidence suggests that while fixed costs of issuing equity have not changed over time, variable costs have increased. At the same time, percentage spreads have become less sensitive to the relative size and the risk characteristics of the issue / acase@tulane.edu

acase@tulane.edu