Essays in Corporate Finance and Banking

Abstract

This dissertation focuses on corporate finance and banking. Chapter 1 examines the way creditor rights affect borrower financing and investment decisions. By utilizing a sample of over 1.5 million public and privately held firms within Europe, it is the most comprehensive analysis of the impact of creditor protection on the demand side of the credit market. The heterogeneity within this sample also allows for a more detailed understanding of the ways different types of firms are impacted. I find that greater levels of creditor protection overall lead to higher firm leverage, especially for firms with lower tangible assets. Smaller firms are able to borrow more when the secured creditor is paid first, which leads to higher investment. However, firms with high levels of tangible assets that operate in economies with stronger creditor rights fear inefficient liquidation, which leads them to decrease their financial leverage as well as cash-flow risk, even if it means pursuing unprofitable projects. Creditor rights also amplify the agency conflict between debt and equity holders in the sense of the risk-shifting literature and lead to increased risk-taking and decreased profitability for highly levered firms. Chapter 2 focuses on the policy of Too-Big-To-Fail banks. While the policy of Too-Big-To-Fail has received wide attention in the literature, there is little agreement regarding economies of scale for financial firms. We take the stand that systemic risk increases when the larger players in the financial sector have a larger share of output. Calculations indicate that the cost to the macro-economy due to increased systemic risk is always much larger than the potential benefit due to scale economies. When distributional and intergenerational issues are considered, the potential benefits to economies of scale are unlikely to ever exceed the potential costs due to increased risk of a banking crisis.