Essays in Corporate Finance

Abstract

This dissertation contains three essays that explore topics in corporate finance and banking. Chapter 1 studies the role of board's political connections in corporate misconduct. Leveraging a policy shock in China that mandated politically connected directors to resign from corporate boards, I find that following the disruption in political connections, firms become less prone to commit misconduct while their misconduct is more likely to be detected. The elimination of political connections on board is particularly effective in deterring and detecting high-level offenses. The effects of the policy are also more pronounced for non-state-owned enterprise and firms in regions with lower level of corruption. I also find that firms affected by the shock are more inclined to initiate Directors and Officers insurance coverage and executives from such firms exhibit more negative sentiments in communications. Overall, the results suggest that political connections may shape firm compliance and facilitate a more lenient regulatory environment for the firm, thereby posing significant challenges to effective regulatory oversight.

In Chapter 2, we argue that bank holding companies (BHCs) extend shadow insurance to the prime institutional money market funds (PI-MMFs) they sponsor and that PI-MMFs price this shadow insurance by charging investors significantly higher expense ratios and paying lower net yields. We provide evidence that after September 2008, expense ratios at BHC-sponsored PI-MMFs increased more than at non-BHC-sponsored PI-MMFs. Despite higher expense ratios, BHC-sponsored PI-MMFs did not experience larger redemptions than non-BHC-sponsored PI-MMFs. In addition, we show that expense ratios increased with BHCs' financial strength and the likelihood of their support; however, this expense ratio differential disappeared after the 2016 MMF reform.

Chapter 3 studies how the revelation of financial misconduct affects the peer firms of the accused firm. I find that such spillover effect exists in both equity and debt markets using event study approach and staggered difference-in-differences design. In the equity market, the peer firms of the accused firm suffer significant negative cumulative abnormal returns. In the debt markets, both loans and bonds of the peer firms exhibit significantly higher spread over the benchmark risk-free rate following the misconduct revelation. Peer firms that employ the same auditor as the accused firm are more adversely affected. These peer firms not only experience even lower cumulative abnormal returns but also face tighter terms from creditors including collateral requirements and more restrictive covenants. They are also more likely to replace their auditors to distance themselves from the accused firm. The findings are consistent with the notion that financial misconduct erodes the trust in capital markets, prompting market participants to reassess the credibility of the non-accused peer firms.