Essays on Rollover Risk, Bank Loans, and Financial Regulation
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My dissertation consists of three chapters that address the issues of rollover risk, shareholders' risk taking, and financial regulation, from both theoretical and empirical perspectives. The first chapter surveys the literature on rollover risk, the q theory of investment, and the dynamics of capital structure. When the market liquidity shocks intensify, equity holders' rollover losses become substantial, which amplifies the agency conflict between creditors and equity holders. The marginal value of liquidity plays an important role in determining corporate cash management, financing, hedging, payout and investment policies, especially when the level of internal cash is extremely low. All these variables are endogenous, as a result of which they together characterize a firm's optimal capital structure. The second chapter focuses on rollover risk in the context of corporate finance. In this chapter, I identify a special channel (the long-term debt maturity structure) through which the credit crisis of 2008 affected corporate investment. I provide empirical evidence of shareholders' risk-shifting behavior in the investment decisions by exploiting the real effects of ex-ante heterogeneity of long-term debt maturity structure. The first hypothesis, which examines the relationship between financial frictions and risk-shifting behavior. The second hypothesis, which studies the effectiveness of debt covenants in mitigating agency conflicts. In the third chapter, I investigates the effectiveness of the Federal Reserve Bank's Commercial Paper Funding Facility (CPFF) in restoring the stability of large and complex financial institutions. Using hand-collected data from the Federal Reserve Board, I evaluate the consequences of the Fed's intervention in the short-term credit market. I first show that (recipient) banks with access to the Commercial Paper Funding Facility earned significantly higher abnormal returns than those without this access. Second, my empirical findings indicate that liquidity backstop facilitated lending from recipient banks to their relationship borrowers. In terms of bank loans, CPFF lenders increased the quantity of loans provided and charged lower yields for firms with which they had strong past relationships. My analysis highlights the important implications of explicit government guarantees in providing timely short-term credits to systemically important institutions and reducing their rollover risks.