Essays on family business groups, corporate investments, and cash management

Abstract

This thesis consists of three independent essays in empirical corporate finance. The first essay examines how the business group structures facilitate higher investment rates of group-affiliated firms relative to standalone firms in the face of supply shocks to external financing precipitated by the 2008 Global Financial Crisis. This study finds that access to an internal capital market via membership of a business group moderates the firms’ dependence on external capital. Consequently, group-affiliated firms have financing and investment advantages over standalone firms especially during a financial crisis. The evidence sheds light on the heterogeneity of firm-level investment policy responses when external capital markets are under severe stress.

The second essay examines whether a firm’s qualitative funding disclosures provide credible information to the market about the firm’s financing policy. Using an innovative textual analysis technique known as grammatical Natural Language Processing to identify types of funding sources in the “Liquidity and Capital Resources” section of 10-K filings, the study documents evidence that firms that disclose plans to rely on external financing do indeed issue more equity and debt securities, and have higher investment rates in the next period. Moreover, since the disclosures transfer information to the market, they reduce information asymmetry, and consequently lead to a lower cost of capital for firms disclosing more information. This study sets a new benchmark for textual analysis methodology, and stresses the importance of qualitative disclosures in providing useful predictive information to outsiders.

The third essay examines how political uncertainty affects corporate cash holdings. The study’s use of hand-collected data on political incidents of a non-electoral nature instead of national elections to proxy for political uncertainty mitigates endogeneity concerns. Consistent with the precautionary motive for holding cash, the results show that firms increase cash balances by 5.2% in years when non-electoral incidents occur, while there is no statistically significant change to cash holdings around national elections. The two key implications of this study are 1) political uncertainty significantly impacts cash management decisions, and 2) national elections are not a good identification of political uncertainty.