This thesis comprising three empirical papers shows that financial development, equity market performance, internal resources, governance, and the chief executive officer (CEO) play significant roles in shaping investment and value of firms as well as corporate growth in different industries....[ Read more ]
This thesis comprising three empirical papers shows that financial development, equity market performance, internal resources, governance, and the chief executive officer (CEO) play significant roles in shaping investment and value of firms as well as corporate growth in different industries.
The first paper re-considers Rajan and Zingales (1998). These authors demonstrate that in more financially developed countries, industries that are more dependent on external finance grow more rapidly. We argue that their tests may not have distinguished between the view that financial development facilitates growth by lowering the cost of external finance and alternative views of growth motivated by trade/development theories. We provide evidence in support of both views. Additionally, we show the presence of the "equity-financing channel": more externally dependent sectors grow more in countries with better stock market performance.
The second paper investigates the response of multi-segment firms to adverse sales shocks to some of their segments. When firms experience a sharp decline in sales in some segments, there is less investment and higher investment-cash flow sensitivity in their remaining segments for at least three years. Lower availability of internal funds alone cannot explain the decrease in investment. We identify a collateral channel through which the impact of the shock is transmitted to the other segments. Consistent with efficient internal markets, the lower level of investment is more prominent in those segments of poor prospects or of lower productivity. Subsequently, there is more addition and shedding of industry segments of these firms as well.
The third paper demonstrates that the loss of a capable CEO affects firm value adversely. When relatively highly paid CEOs resign to take up top positions elsewhere, the stock price of the firms falls significantly. The decline in stock price is greater when the pre-resignation pay of the CEO in relation to other top executives of the company is higher. The cash flow-investment sensitivity of these firms also increases after the departure of the CEO. In contrast, for CEOs with poor labor market progress, firm value increases on announcements of their resignations, which is positively related with the pay level of the CEOs.
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