Three Essays in Corporate Finance

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Drapeau, Line
Collusion , Leniency laws , Competition , Firm value , Tradable industries , Tax avoidance
Leniency laws constitute a powerful deterrent to the formation of new cartels and an effective tool facilitating the dismantling of existing cartels, thereby introducing a competition shock in the countries where they are enacted. While the connection between product market competition and firms’ financial decisions has been a subject of interest (e.g., Khanna and Tice (2000), Xu(2012), Jiang, Kim, Nofsinger, and Zhu (2015)), the lack of exogenous variation has hindered definitive inferences. This thesis explores the impact of the anticipated passage of leniency laws worldwide on firms’ valuations and financial decisions. In the first study (Chapter 2), I investigate the causal link between competition and firm value. My findings indicate that the investing and funding decisions made after the anticipated enactment of leniency laws translate into an increase in firm value for the average firm. However, this value-enhancing effect is concentrated among those firms that are domiciled in developed countries operating under common law, in countries where law enforcement is strong, and in countries where corporate governance standards are high. In the second study (Chapter 3), I investigate whether the impact of competition on firms' financial decisions, as documented by Dasgupta and Žaldokas (2019), is stronger for firms in tradable industries, where prices are set internationally, rather than for firms in nontradable industries, where prices are set domestically. I find that firms in tradable industries experience more asset growth, mainly explained by a rise in cash. Moreover, these firms undertake more funding by equity in response to a reshuffle of their asset base. In the third study (Chapter 4), I investigate the causal link between competition and tax avoidance. The results indicate that, on average, firms do not engage in more or less tax avoidance. However, firms operating in more concentrated industries reduce their tax avoidance. The latter is statistically significant only when U.S. firms are included in the sample. This finding suggests that the reduction in tax avoidance is primarily present among U.S. firms in more concentrated industries.
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