Essay One: Can Firms Build Capital-Market Reputation to Substitute for Poor Investors Protection? Evidence from Dividend Policies...[ Read more ]

Essay One: Can Firms Build Capital-Market Reputation to Substitute for Poor Investors Protection? Evidence from Dividend Policies

The existing literature on law and finance generally assumes that firms are passive recipients of the influence of investor protections on their ability to raise external financing. In this paper, we empirically identify a commitment mechanism, i.e., dividend payouts, which firms use to compensate for country-level weak protection of shareholders and to establish capital market reputation so that they obtain better access to equity markets. We show that growth firms in countries where legal protection of outside investors is weak tend to initiate dividends early and pay a higher level of dividends both as compared to their counterparts in strong protection countries and as compared to mature firms in the same legal regime. As evidence of better access to equity markets, in weak protection countries, a good dividend history (i.e., three years of consistently high dividend payouts) allows growth and equity dependent firms in low protection countries to raise more equity financing.

Essay Two: Stock Market Liberalization and Financial Constraints: Firm-level Evidence from Emerging Markets

While the existing literature generally finds a positive effect of a country’s stock market liberalization on its economic growth, industry expansion and firm performance, little is known as to how the effect takes place, and the results are often plagued by endogeneity problem. In this paper, we empirically identify reducing a firm’s financial constraint is a channel through which market liberalization affects real activity. Using firm-level data from major emerging markets, we show firms that are investable by foreign investors are associated with lower cash flow sensitivity of cash, and the negative relation results from small firms, growth firms, and firms in countries with well developed financial systems. We also find this negative relation is weakened during recessions. Firm fixed effects models suggest the relation between stock market liberalization and decrease in financial constraint is causal rather than pure correlation.