Empirical Essays in Corporate Finance

Abstract

Over the past twenty years, write-offs have grown in popularity. With the increased usage of write-offs, it is becoming more important to understand the mechanisms behind why companies take write-offs and how write-offs affect company performance. In this paper, I examine the cross-sectional determinants of the decision to take write-offs. I use a hand-collected dataset on write-offs that is much more comprehensive than existing write-off datasets. Contrary to much hype and scandals surrounding a few write-offs, I find that quality of governance is positively related to write-off decisions in the cross-section. My results also suggest that poor governance companies wait to take write-offs until it becomes inevitable, while well-monitored companies take write-offs sooner. As a result, the charge is substantially larger than the average write-off charge. When these poor governance companies announce write-offs, the announcement generates negative abnormal returns. However, when good corporate governance companies announce write-offs, the charge is substantially smaller than the average charge. These well-monitored companies take write-offs immediately following a problem. Following the write-off announcements of these types of companies, average announcement day effects exceed a positive six percent. These results suggest that companies with quality monitoring mechanisms use write-offs in a manner that is consistent with enhancing shareholder value.

In my second essay I examine the effect of write-off announcements on the stock market liquidity of firms taking write-offs from 1980 to 2000. I find that there are substantial improvements in stock market liquidity following corporate write-offs. Spreads decrease and turnover volume increases after write-off announcements, which indicates an improvement in liquidity. The liquidity improvement is greater for better governed companies. I decompose bid-ask spreads and show that adverse selection costs decrease substantially as market participants respond to the write-off announcement. The evidence suggests a liquidity benefit of write-offs that must be weighed against any other perceived cost of write-offs. Such a liquidity benefit may validate that write-offs convey favorable information about the firm.