Essays in corporate financing and investment decisions

Abstract

The evolution of corporate debt markets in recent decades, especially short-term debt facilities and bank debt, has made funding more accessible for corporate borrowers. On the other hand, the changing environment of debt markets also creates new challenges for corporate borrowers. First, as the debt maturity structure has become shorter, companies face higher liquidity pressure. Second, since banks also increasingly rely on short-term wholesale funding, the maturity mismatch of bank assets and liabilities has widened, further increasing economy-wide liquidity risk. These problems were illustrated by the most recent liquidity crisis that lasted from 2007 to 2009. Understanding the implications of borrowing using short-term debt therefore is crucial for the modern corporate finance. Moreover, the issues regarding the maturity mismatch of the banking sector imply that fluctuations in bank credit might increase, as banks become more sensitive to liquidity constraints. This thesis explores a number of issues regarding the use of short-term debt by non-financial companies, as well as the implications of fluctuations in bank credit for corporate financial and investment policies. The thesis contains three empirical research essays, presented individually in Chapters 2, 3 and 4. The first essay investigates the implications of debt maturity structure on corporate investment activities in the presence of firm specific default risk. The second and the third essays examine the implications of bank credit cycles on corporate activities. Essay 2 studies the effect of bank credit cycles on firms’ choice of external financing issues, whereas Essay 3 examines the effect of bank credit on corporate liquidity management policies and the spending on different types of investment.