Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Finance

Program Name/Specialization

Finance

Faculty/School

Lazaridis School of Business and Economics

First Advisor

Madhu Kalimipalli

Advisor Role

Supervisor

Second Advisor

Si Li

Advisor Role

Supervisor

Third Advisor

Jin Wang

Advisor Role

Committee Member

Abstract

This dissertation comprises three essays investigating topics in Corporate Debt Contracting and Innovation. The first essay examines the relation between Passive Institutional Ownership (IO) and debt covenants. Using Russell 1000/2000 annual index reconstitution as a source of exogenous variation in passive IO, I find that passive IO leads to reduced covenants in the bond market. Specifically, I find that passive IO leads to reduced (a) Investment, (b) Dividend restriction, and (c) Subsequent financing restriction. However, I observe weaker results for loan covenants, implying that loans, usually collateralized, are less sensitive to changes in passive ownership. The overall effect of passive ownership on bond covenants supports the argument that passive institutional investors are effective monitors, and their interests are closely aligned with creditors’, thereby lowering monitoring costs for creditors and reducing dependence on tighter bond covenant restrictions. The second essay investigates how labor union strength may influence private and public debt covenants. We employ fuzzy Regression Discontinuity Design (RDD) and use plant-level union election outcome data for firms (between 1977 and 2020) as quasi-exogenous shock to examine the effect of labor unions on firm-level loan as well bond market covenants. Our extensive RDD analysis shows that unionization leads to significantly lower covenants in public bond issuances and in particular reduced levels of (a) Investment, (b) Subsequent financing, and (c) Event-related bond restrictions. Loan markets show limited evidence of covenant reduction implying that bank lending, typically collateralized, is less sensitive to labor market frictions. Firm-level channel analyses show that following successful union elections, stronger unions help mitigate the agency risks and reduce covenant threshold in firms with other forms of monitoring in place (i.e., firms in highly competitive product markets, firms with high institutional ownership, firms with high credit ratings, and firms with better corporate governance). Sub-sample analyses based on firm characteristics show that the negative effect of union on covenant is stronger for firms with higher level of risk ex-ante (i.e., firms with higher RD investment ratio, firms with higher leverage ratio, and firms with lower profitability 3 ratio). Our results are therefore consistent with the argument that lenders’ and unions’ interests are closely aligned in non-bankruptcy states, thereby leading to lowering monitoring costs for creditors and reduced dependence on tighter bond covenant restrictions. The third essay investigates whether peer firms’ R&D activities increase the focal firm’s tendency to engage in discretionary R&D spending. Building upon network concepts and using Panel Data on US innovative public firms, we show that peer firms’ R&D activities indeed increase the focal firm’s tendency to engage in discretionary R&D spending. Further analyses show that this effect is weaker for firms with high incentive to engage in earnings management. Such firms include (a) firms suspected to manipulate their earnings, (b) firms engaging in SEO in the following year, (c) firms with low institutional holding, and (d) firms with low profitability. Our sub-sample analyses suggest that the potential benefit from enhanced innovation productivity (due to reduced earnings management through R&D) is of second-order importance compared to firms’ incentive to engage in earnings management.

Convocation Year

2024

Convocation Season

Spring

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