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Three Essays in Finance

Kim, Sehoon
http://rave.ohiolink.edu/etdc/view?acc_num=osu1498750199681262

Abstract Details

2017, Doctor of Philosophy, Ohio State University, Business Administration.
This dissertation is comprised of three essays that study the consequences of financial frictions in the context of corporate finance and asset pricing. The first and second chapters are empirical investigations of how firms use their internal finances to make real corporate decisions, and how external forces influence the efficacy with which firms utilize their internal resources. The third chapter is an attempt to quantify market frictions and their impact on the cross-section of stock returns. In the first chapter, I study how corporate cash holdings impact firms' product pricing strategies. Exploiting the Aviation Investment and Reform Act of the 21st Century as a quasi-natural experiment to identify exogenous shocks to competition in the airline industry, I find that firms with more cash than their rivals respond to intensified competition by pricing more aggressively, especially when there is less concern of rival retaliation. Financially flexible firms based on alternative measures respond similarly. Moreover, cash-rich firms experience greater market share gains and long-term profitability growth. The results highlight the importance of strategic interdependencies across firms in the effective use of flexibility provided by cash. The second chapter studies the effects of hedge fund activism on the activity and efficiency of target companies' internal capital markets. I find that firms targeted by activist hedge funds significantly increase investment cross-subsidies between divisions, predominantly by enhancing the efficiency of their internal resource allocations. Following Schedule 13D filings by activist hedge funds, segment investments of targeted companies become more sensitive to cash flow generated elsewhere in the firm, and this increase in cross-subsidization is primarily driven by the redirection of firm cash flows toward segments with high Tobin's Q. The increases in the activity and efficiency of internal capital markets due to hedge fund activism are unlikely to be driven by measurement errors in Tobin's Q or changes in unobserved correlations across segments. In the third chapter, co-authored with Kewei Hou and Ingrid Werner, we propose a parsimonious measure based solely on daily stock returns to characterize the severity of microstructure frictions at the individual stock level and assess the impact of frictions on the cross section of stock returns. Based on our measure, stocks with the largest frictions command a value-weighted return premium as large as 10% per year on a risk-adjusted basis. The friction premium is stronger among small, low price, volatile, value, and illiquid stocks. Return spreads associated with momentum and idiosyncratic volatility are smaller and statistically less significant than previously documented after screening out stocks with high microstructure frictions. Using UK data, we show that our measure is useful in settings where the availability of quality data on trading volume, bid-ask prices, and intraday high-low prices is limited.
Rene Marcel Stulz (Advisor)
Kewei Hou (Committee Member)
Bernadette Alcamo Minton (Committee Member)
Berk Andrew Sensoy (Committee Member)
180 p.
Business Administration; Finance
Cash; Financial Flexibility; Product Market; Competition; Multimarket Contact; Hedge Fund; Shareholder Activism; Corporate Governance; Internal Capital Market; Resource Allocation; Microstructure Frictions; Return Measurement Bias; Anomalies

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Citations

  • Kim, S. (2017). Three Essays in Finance [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1498750199681262

    APA Style (7th edition)

  • Kim, Sehoon. Three Essays in Finance. 2017. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1498750199681262.

    MLA Style (8th edition)

  • Kim, Sehoon. "Three Essays in Finance." Doctoral dissertation, Ohio State University, 2017. http://rave.ohiolink.edu/etdc/view?acc_num=osu1498750199681262

    Chicago Manual of Style (17th edition)

osu1498750199681262
522
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