Three essays on corporate finance

Abstract

Chapter 1 hypothesizes that some banks specialize in providing monitoring capital, which includes monitoring services in addition to financial capital, and that such specialization leads them to focus their lending on financially weak firms. I test this hypothesis by constructing a variety of novel measures of banks' monitoring skills and find that financially weak firms are more likely to match with banks that have high monitoring skills and that shocks to firms' financial strength cause them to switch to banks that are a better fit to their new monitoring needs. Chapter 2 investigates how the switching cost, as a result of informational frictions, affects firms' migration behavior. I propose a novel mechanism whereby banks can coordinate with other institutions with which they conduct business; when a relationship bank determines that its firm matching is inefficient, under some conditions, it can transfer the firm to the bank's partner. Using the loan spread residual as a proxy for unobservable credit shocks, I find consistent evidence that a firm with a larger magnitude residual has a higher likelihood of going to a bank that is not a relationship bank but rather a syndicate partner of its relationship bank; and when the spread residual is positively large, the bank partner to which the firm switches tends to put a high stake in the syndicate, which is consistent with its monitoring role for a distressed firm. Chapter 3 proposes that alliances are a channel for merger propagation when partnering firms have complementary resources. I confirm the mechanism's main prediction using US data on corporate alliances and merger activity: The likelihood that a firm will be involved in mergers and acquisition (M\&A) increases significantly if its partners have also engaged in M\&A during the previous two years. My empirical result is not explained by industry-wide M\&A activity or company characteristics. I present three additional empirical results: (i) The propagation effect is stronger when I include proxies for the strength of post-partner-merger resource reallocation, which is consistent with the mechanism, (ii) merger propagation effects are not merely localized but rather diffuse through the alliance network, and (iii) partner mergers also lead to a higher likelihood of entering new alliances.