Essays on empirical corporate finance

Abstract

This thesis contains three essays on empirical corporate finance. The first chapter focuses on the issue of underfunded corporate pension schemes and examines whether sponsors of defined-benefit schemes choose discount rates strategically to understate the funding deficits. I first show that methods used by previous studies to examine the question are subject to estimation biases. I formally derive the biases and perform simulations to quantify their impact on estimation results. I then develop a new approach to estimation that mitigates the biases. Empirical evidence suggests that sponsors with weaker funding status tend to select higher discount rates to understate pension deficits. I further show that sponsors with overfunded defined-benefit schemes have the propensity to assume a lower discount rate to understate funding surpluses, as the surplus may give rise to ‘visibility costs’.

The second chapter examines the impact of institutional ownership on investment by private companies. I examine the impact of a broad spectrum of institutions and their ownership, including all types of private equity (PE) and venture capital (VC) funds, non-PE institutions (such as banks, insurance companies, and mutual funds) and shareholdings that represent minority as well as controlling ownership. I provide novel evidence that institutional investors promote intangible investment by established private firms through the alleviation of financing constraints. The effects are greater in firms with noncontrolling institutional ownership. This work broadens the evidence on the impact of institutional investors on the investment behaviours of private companies, as prior evidence has been limited to leveraged buyouts. It also highlights the importance of intangible investments, which has been understated by previous research.

In the third chapter, I examine the impact of PE buyouts on the bargaining power of takeover targets relative to downstream customers. I document that buyout targets significantly reduce trade credit provision following the buyout and the reduction is greater when the target: operates in a more competitive industry; has ex-ante lower bargaining power, and when the private equity fund is larger. The evidence suggests that private equity investors elevate the bargaining power of buyout targets and enable them to provide less trade credit to customers. This chapter contributes to the literature on the impact of PE investors on portfolio firms and the debate on the determinants of trade credit provision. Previous studies argue that the level of financial constraints of suppliers is the primary determinant of trade credit provision. The evidence I presented in this chapter implies that bargaining power is a more important determinant than the degree of financial constraints, at least during normal periods when bank credit is not scarce.