THESIS
2015
vi, 95 pages : illustrations ; 30 cm
Abstract
This thesis studies the effect of financial contracting on two major corporate activities -
trade credit finance and mergers and acquisitions. Chapter 1 examines when a borrowing
firm violates loan covenant, how bank interventions in this borrower affect the borrower's
trade credit. Trade credit declines when banks obtain additional control rights following
debt covenant violations. Interventions that are likely to result in acceleration of loan
repayments lead to larger reductions in trade credit. In addition, dependent suppliers
that have made customer-specific investments are adversely affected by bank interventions.
Ex ante, firms take into account the effect of bank control on dependent suppliers
and accordingly offer less restrictive debt contracts. These results suggest t...[
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This thesis studies the effect of financial contracting on two major corporate activities -
trade credit finance and mergers and acquisitions. Chapter 1 examines when a borrowing
firm violates loan covenant, how bank interventions in this borrower affect the borrower's
trade credit. Trade credit declines when banks obtain additional control rights following
debt covenant violations. Interventions that are likely to result in acceleration of loan
repayments lead to larger reductions in trade credit. In addition, dependent suppliers
that have made customer-specific investments are adversely affected by bank interventions.
Ex ante, firms take into account the effect of bank control on dependent suppliers
and accordingly offer less restrictive debt contracts. These results suggest that debt
covenant violations have large negative externalities for dependent suppliers and firms
take these externalities into account when designing loan contracts.
In Chapter 2, we find that differences in the compensation of acquirer and target firms'
management teams negatively affect the outcomes of mergers. Larger differences in top
management pay are associated with lower returns to the acquiring firm after the announcement
of the merger and negative combined wealth effects. Larger pay differences
also increase the likelihood of employee layoffs. Overall, our results suggest that differences
in executive compensation are indicators of integration problems at merging firms,
which in turn negatively affect merger outcomes.
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