Essays in corporate finance

Mahmud, Syed Ehsan (2018) Essays in corporate finance. PhD thesis, University of Nottingham.

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Abstract

This thesis comprises three essays in corporate finance, with a focus on corporate risk management and debt diversity. The first chapter examines the impact of derivatives use on the cost of equity for German non-financial firms. Using hand-collected data on derivatives use for a sample of German non-financial firms, I find that user firms have a 306 basis point lower cost of equity than non-users. This reduction in the cost of equity of users is attributable to their lower market, size, and value risk factor exposures. The observed negative relation between derivatives use and the cost of equity remains robust to specifications that account for potential endogeneity arising from a firm's derivatives hedging and capital structure decisions. I find that the reduction in the cost of equity is largest for smaller firms and for firms making use of foreign currency and interest rate derivatives. Moreover, new derivatives users experience a significant reduction in the cost of equity capital in the first year of adoption.

In the second chapter, I empirically examine the impact of derivatives use on firms' distress risk using hand-collected data from the annual reports of German non-financial firms. The time period of this empirical analysis spans from 1999 to 2010. I find that derivatives using firms have lower distress risk. I use Heckman's two-stage treatment effect model to account for the unobservable factors that could affect the decision of the firm to use derivatives. Even after accounting for the unobservable factor bias, the results confirm that hedging reduces financial distress risk significantly. Moreover, I find that firms using foreign currency and interest rate derivatives can benefit via the reduction in financial distress risk.

Using a comprehensive data for 46 countries firm's choice of the debt instrument, I find that firms use debt from many sources. Firms those sources debt from only one source or more specifically from the Bank, significantly lower their investment during the financial crisis. However, the firms those source debt from public market shows insignificant negative impact during the financial crisis. Later, I find that during the financial crisis time firms with higher financial distress exhibit negative impact on the bank debt. Whereas, firms with higher financial distress during the financial crisis shows a positive association with public debt. Findings of this study suggest that during the crisis period firms with access to the bond market issue bonds to substitute bank debt. However, this substitution is not one-for-one, so the firms experience deleveraging and consequently underinvestment.

Item Type: Thesis (University of Nottingham only) (PhD)
Supervisors: Judge, A.P.
Ahmed, S.
Keywords: Corporate risk management, derivatives, hedging, debt specialization, investment
Subjects: H Social sciences > HD Industries. Land use. Labor
Faculties/Schools: UK Campuses > Faculty of Social Sciences, Law and Education > Nottingham University Business School
Item ID: 51598
Depositing User: Mahmud, Syed
Date Deposited: 18 Jul 2018 04:40
Last Modified: 18 Jul 2020 04:30
URI: http://eprints.nottingham.ac.uk/id/eprint/51598

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