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Three Essays on the Effect of External Business Environment on Corporate Investment

Li, Bochen
http://rave.ohiolink.edu/etdc/view?acc_num=ucin1510917711796412

Abstract Details

2017, PhD, University of Cincinnati, Business: Business Administration.
This dissertation consists of three related essays on corporate investment. In Essay I, I examine how the characteristics of the country in which firms operate affect firm’s “fourth quarter effect”. In Essay II, I study how firm’s local risk preference influence their acquiring decisions. And in Essay III, I investigate the relation between country laws and institutions and corporate pension underfunding, as well as the sensitivity of corporate investment on pension underfunding. Essay I: It is documented that companies and government agencies in the United States invest more in the fourth fiscal quarter without having higher investment opportunities. While previous studies focus on the agency conflicts and information asymmetry within organizations, we are motivated by Scharfstein and Stein’s (2000) two-tiered agency model, and examine how firms’ external business environment affects the “fourth quarter effect”. We implement our study in a sample of 41 countries, and observe similar seasonality in firm investment as documented in the U.S. market. More importantly, using country characteristics, we find that firms from countries with better investor rights and protection, and more developed financial markets show less severe over-investment in the fourth fiscal quarter. Essay II: This essay studies how managers’ risk aversion, captured by the local religious beliefs prevailing in the locations of their firms, could affect firms’ merger and acquisition activities. We find that firms headquartered in areas with higher Catholics-to-Protestants (CP) ratio, reflective of stronger gambling preferences, tend to conduct more acquisitions. Moreover, these acquisitions are more likely to be international and conglomerate, and more likely to involve targets with high stock return volatility and R&D spending. The acquisitions are also associated with value destruction from the perspective of the acquiring firm’s shareholders and the effect is magnified in an environment of weaker corporate governance. When we interact CP ratio with executive's career risk, we find that local gambling preference significantly promotes managerial risk-taking in mergers and acquisitions. Essay III: Financial crises, low interest rate, and extended life expectancy cast doubt on whether corporate defined benefit (DB) pensions are sufficiently funded to cover their liabilities. We study the effect of pension underfunding on corporate investment using international data involving 29 countries at heterogeneous economic development stages and different regulatory environments. We document that corporate pensions are significantly underfunded in most countries of our sample in the period of 2001 to 2015. Pension assets are on average less than 50% of pension liabilities among firms that provide DB pension plans. To the extent of pension underfunding effect on corporate investment, we find that the (inverse) relationship is subject to variation in country characteristics. Specifically, firm’s investment is more severely constrained by pension underfunding in countries with stronger labor union power and less developed financial market. Finally, while substantial pension underfunding has a negative impact on firm value, our results show that offering more DB pension plans do not reduce firm value. Overall, our findings suggest that DB pension plans could still play a useful role in creating firm value.
Yong Kim, Ph.D. (Committee Chair)
Alexander Borisov (Committee Member)
Jeffrey Mills, Ph.D. (Committee Member)
Tong Yu (Committee Member)
Business Administration
Internal capital market; International fourth quarter investment; Mergers and acquisitions; Gambling preference; International pension underfunding

Recommended Citations

Citations

  • Li, B. (2017). Three Essays on the Effect of External Business Environment on Corporate Investment [Doctoral dissertation, University of Cincinnati]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=ucin1510917711796412

    APA Style (7th edition)

  • Li, Bochen. Three Essays on the Effect of External Business Environment on Corporate Investment. 2017. University of Cincinnati, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=ucin1510917711796412.

    MLA Style (8th edition)

  • Li, Bochen. "Three Essays on the Effect of External Business Environment on Corporate Investment." Doctoral dissertation, University of Cincinnati, 2017. http://rave.ohiolink.edu/etdc/view?acc_num=ucin1510917711796412

    Chicago Manual of Style (17th edition)

ucin1510917711796412
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This open access ETD is published by University of Cincinnati and OhioLINK.