UBC Theses and Dissertations

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UBC Theses and Dissertations

Essays in empirical corporate finance : the impact of economic uncertainty on the financial markets Guan, Xuejing


This thesis consists of three essays studying the impacts of economic uncertainty on the financial markets. The first essay examines the impact of economic uncertainty on firms’ decisions to go private. Using an instrumental variable approach, I show that firms are more likely to go private following economic uncertainty shocks. The effect is stronger for firms prone to severe agency conflicts. After going private, the cost of debt decreases. These results are consistent with uncertainty exacerbating agency frictions faced by public companies. Firms go private to alter their capital structures to be less prone to agency frictions: ones with a small number of dominant stakeholders with aligned interests. The agency frictions are mitigated through going private, resulting in a decrease in the cost of debt. The second essay examines how the money creation function of banks affects the relative cost of firm financing in the bank loan vs. bond market – the loan-bond spread. Using a sample of loans and bonds issued by the same firm, the essay finds a lower loan-bond spread for firms impacted by positive information cost shocks. We call this decline in the relative cost of bank credit induced by firm information cost shock the opacity discount and show that it is consistent with the “money creation” hypothesis in the financial intermediation theory, which suggests that banks need to keep information about their assets secret to produce private money. The third essay studies how firms use earnout, a contingent payment contract in M&A, to manage valuation risks under uncertainty. I find that the usage of earnouts positively correlates with target uncertainty. The likelihood of deal completion increases significantly with earnouts. Despite the benefits of bridging the valuation gap, an earnout can introduce incentive misalignment problems in the post-transaction period. After the transaction, the acquirer’s objective is to maximize firm value, while the target’s objective is to maximize earnout payments. Such incentive misalignments can destroy firm value. The essay documents a negative impact on acquirer wealth gains when earnouts are not used to manage valuation risks.

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