Essays in corporate finance and market efficiency

This dissertation focuses on agency conflicts between shareholders and creditors as well as how markets evaluate human capital networks. In the first chapter, I examine empirical evidence for risk-shifting in a quasi-natural experiment. In the second chapter, we study if creditors use dual ownership to protect themselves from agency conflicts. In the third chapter, we test if a network based on interfirm employee movements is fully accounted for by the financial market.

In Chapter 1, I find empirical evidence that financially distressed firms increase investment risk. I exploit a natural experiment where the treated firms must refinance long-term debt during the 2007 credit crisis. The increase in investment risk is concentrated among subsamples of firms with fewer shareholder-manager agency conflicts, with lower bank debt, or with more reliance on risky investments. These subsample results are also consistent with risk-shifting theory. Contrary to previous empirical papers, these results suggest that the risk-shifting theory does occur.

In Chapter 2, Dennis Hamilton, Steven Irlbeck and I study why creditors simultaneously hold equity in the same firm. We posit that holding both debt and equity can protect the value of debt which may be at risk for expropriation by stockholders. Using a regression discontinuity design and exogenous events that increase the probability of a wealth transfer, we find that creditors respond by purchasing equity. Importantly, this effect is true for bondholders but not for lenders who are already protected via control rights.

In Chapter 3, Yuanyang Liu, Gautam Pant, Shagun Pant, and I find that inter-firm human capital migration network centrality (HCMNC) is a strong positive predictor of future stock returns after controlling for firm characteristics and risk. We construct the human capital migration network using publicly available data from LinkedIn. A long-short value-weighted portfolio of firms ranked on HCMNC earned an annualized four-factor alpha of 5.5%. We find stronger return predictive power of HCMNC for firms with lower investor attention and higher valuation uncertainty. HCMNC is also associated with higher future operating performance, higher future profitability, and positive future earnings announcement surprises. The evidence is consistent with the market underreacting to HCMNC.