Essays on corporate investment
2013-06
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Essays on corporate investment
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2013-06
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My dissertation focuses on corporate investment, especially on its connection with asset prices. The first chapter explores the connection between firms investment and their bond prices, from the perspective of Q theory. The Q theory says that the market-to-book ratio, or the Tobin's Q, contains the information about firm investment opportunities. In this paper, I ask the question whether credit spreads could signal firm investment opportunities just like Tobin's Q. Since both credit spreads and Tobin's Q are market prices, they should contain similar information about the firm. To formally examine this idea, I develop a continuous-time investment model in which an analytical relation is established between the unobservable investment opportunities (marginal Q) and the observable credit spreads. Using U.S. firm level data from 1980 to 2011, I find that credit spreads are a statistically important predictor of firm investment and their explanatory power is higher than that of Tobin's Q. The empirical evidence shows that credit spreads pick up the effects of financial frictions (costly external financing and debt overhang), which drive a wedge between marginal and Tobin's Q. This explains why credit spreads are a better proxy for marginal Q. Consistent with the model, the credit spread elasticity of investment is associated with firm and bond characteristics.The second chapter is coauthored with Murray Frank, and it is a study of the impact of the cost of capital on corporate investment. Empirically, high leverage and high cost of debt reduce investment. According to standard theory, high cost of equity has a negative effect on investment. When well known models such as the CAPM or the Fama and French model are used to infer the cost of equity, the cost of equity has a positive effect on investment. When factor- augmented vector autoregressive (FAVAR) approach is used to allow for a much wider range of determinants, the anomalous result persists. However, when an implied cost of equity capital approach is used, the theoretically predicted negative sign is observed.
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University of Minnesota Ph.D dissertation. June 2013. Major: Business Administration. Advisor: Murray Z. Frank. 1 computer file (PDF); ix, 140 pages, appendix A.
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Shen, Tao. (2013). Essays on corporate investment. Retrieved from the University Digital Conservancy, https://hdl.handle.net/11299/156230.
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