Essays on Firms' Financing and Investment Decisions
This thesis analyses how the capital structures of financial and non-financial firms affect each other and how shocks in the financial sector affect investments in non-financial firms. The thesis consists of three self-contained essays. The first essay provides new evidence on the capital structure determinants of non-financial firms and contributes to the discussion concerning the effect of a regulated financial sector on the real economy. Using syndicated loan contracts, this study identifies the most important lenders for each borrower and analyses the effect of the capital structure of lenders on the capital structure of their borrowers. Keeping the effect of size, tangibility, market to book, profitability and risk fixed, I find that a 1 percentage point increase in the average lenders’ leverage leads to an increase of 12 basis points in borrowers’ leverage. The regulation of the financial sector has recently led to its deleveraging, but non-financial sectors still use debt intensively. The positive effect of lenders’ leverage on the leverage of their borrowers implies that further deleveraging of the financial sector may lead to less indebtedness and less vulnerability of the economy. The second essay analyses the asset-side determinants of bank leverage and investigates the effect of the riskiness of a bank’s assets on its debt issue. The essay uses a novel approach for assessing the riskiness of a bank by analysing the leverage of its borrowers. The advantage of using the borrowers’ characteristics when assessing a bank’s risk (in comparison with accounting measures of risk) is that borrowers’ characteristics are not derived directly from the balance sheet of the bank and the analysis is thus less subject to endogeneity problems. The essay analyses an international sample of financial firms for the period 1995‒2014. By estimating a panel logit regression, I find that, when keeping all other covariates constant, a 1 unit increase in the average borrowers’ leverage decreases the probability of a bank issuing debt by 0.381. This result demonstrates that a bank’s leverage increases when its borrower pool becomes safer; it also questions the presumption that without regulation positive leverage leads to excessive risk taking by banks. The third essay studies the impact of the financial crisis of 2007‒2009 on the real economy, in particular on R&D expenditures. It analyses non-financial firms in high-tech industries in the USA for the period 1998‒2012 under the premise that R&D investment is an important driver of economic growth. Using a GMM procedure to estimate a dynamic investment model, the study finds that financial distress only played a minor role, if any, as a determinant of R&D expenditures during the financial crisis. Financial constraints had a substantially greater impact on R&D expenditures during the crisis. All else being equal, more constrained firms invested more during the financial crisis. While at first sight surprising, this result is consistent with the observation that the average R&D expenditures increased during the financial crisis. Moreover, these results are similar to the results of Nanda and Nicholas (2014. Did bank distress stifle innovation during the Great Depression? Journal of Financial Economics 114(2), 273‒292), who find that the aggregate effect of banks’ distress on innovation during the Great Depression was weak for publicly traded firms, especially in industries that were less dependent on external financing. (Less)