Three Essays in Corporate Finance
Corporate finance, cost of equity, bonds, innovation
In this thesis I present three essays on Corporate Finance. Chapter 1 provides an introduction to the thesis, Chapter 2 presents “Cash Flow Volatility, The Opportunity Cost of Missed Investments, and the Financial Crisis.” This paper examines how firms changed their cash holdings in response to the 2008 financial crisis. I find that firms that would be expected to lose more borrowing capacity, and those that have more to lose from missed investment opportunities increased their cash holdings the most. Chapter 3 presents “The Role of Equity Risk in Determining Share Price around Covenant Violations”, which examines the effect of covenant violations on equity risk. I find that firms see a significant increase in estimated cost of equity in the year leading up to a covenant violation, and a significant decrease in the estimated cost of equity in the year following a covenant violation, and that this change in equity risk contributes significantly to well-documented changes in share price around a covenant violation. Chapter 4 presents “Classifying Innovation: The Influence of Process vs Product Patents on Firm Profitability”, which proposes a new textual analysis method of classifying pharmaceutical patents as process or product innovations, and uses the time series data this technique generates to demonstrate the novel result that the effects of current innovative activity on firm profitability is heavily mediated by a firm’s past innovation choices. Chapter 5 concludes the thesis.