Three essays on corporate finance theories

Abstract

This thesis proposes three information-based corporate finance theories analyzing firms’ behaviors regarding financial crises, information disclosure, and takeovers, respectively. These theories are based on joint works with Frederick Dongchuhl Oh. The first chapter presents a contagious liquidity crises model for nonfinancial firms in which a large creditor influences the extent to which the contagion spreads across firms. We consider a sequential framework where two rollover games occur one after another. A liquidity crisis in one firm triggers a liquidity crisis in another firm through changes in the risk attitudes of creditors from the wealth effect. We show that the presence of a large creditor with a sufficient asset size reduces the contagion effect. Moreover, a concentration of a large creditor's loan portfolio towards the former firm increases the contagion effect. The second chapter presents a model of quality disclosure in which an incumbent, through its quality and disclosure choices, influences the possibility of a new entrant entering a market. In this regard, we consider a sequential framework where the incumbent chooses its quality and decides whether to disclose it to the market

subsequently, the entrant makes the same decisions, if it enters the market. We show that potential competition can create strategic incentives for the incumbent to choose non-disclosure, because the availability of information about the incumbent's quality promotes entry by enhancing the entrant's expected profit from the market. In addition, an analysis of the effects of mandatory disclosure law suggests that such law can be effective in promoting a new entrant into a market, as well as in terms of improving the product quality of established firms. The third chapter presents a model of the medium of exchange in takeovers in which managerial incentives influence the choice of an offer by a bidder manager. We consider a framework where the offer is proposed to the target depending on the bidder manager's private information on synergy and control rights. We identify the case where the choice of the medium of exchange in the offer reveals whether the proposed merger is intended to create a synergy or to pursue empire building. We demonstrate that the perception of the bidder manager with a high appetite for increasing firm size raises the proportion of cash in the offer. Moreover, an increase in the cash flow rights held by the bidder manager leads to a reduction in the proportion of cash in the offer.