Essays in Corporate Finance

This dissertation delves into corporate financing decisions, exploring the implications of the composition of capital structures and examining dynamics in lease financing. The first essay studies the relation between corporate cash holdings and financing source granularity (the level of dispersion of a firm's various external financing sources across its capital structure). I document a negative relationship between financing source granularity and cash holdings, which is more pronounced in financially constrained firms, which are likely to have a greater precautionary demand for cash holdings. I also find that during the 2008–2009 financial crisis, firms with more granular financing structures (built up pre-crisis) maintained lower cash ratios compared to otherwise similar firms. Additionally, low-granularity firms place on average a higher value on an extra dollar of cash relative to high-granularity firms. Overall, these findings support the view that the diversification benefits of financing source granularity are larger at the margin for financially constrained firms, reducing their precautionary demand for cash holdings.

The second essay investigates how three key provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) affect firms' use of operating leases in their financing mix. Firms may use operating leases to sidestep TCJA's limitations on tax deductions of debt interest. TCJA's new provisions on bonus depreciation for equipment and the treatment of net operating losses (NOLs) are also likely to affect firms' leasing incentives. Using a panel dataset of U.S. firms from 2015 to 2021, the research employs a difference-in-differences methodology and finds that firms impacted by the TCJA's limitations on interest deductions increase their operating leases and have a greater tendency to shift from non-lease debt financing to lease financing. Findings also indicate that firms impacted by the bonus depreciation provision of the TCJA reduce their operating leases as a percentage of total assets. Furthermore, I find that firms affected by the TCJA's limitations on net operating loss (NOL) carrybacks and carryforwards increase their use of operating leases relative to asset purchases. Overall, these findings support the view that the TCJA had significant effects on firms' financing decisions about operating leases.

The third essay studies the relation between corporate leasing policy and debt granularity, which is defined as the level of dispersion of a firm's debt structure. I document a negative relationship between debt granularity and operating leases, indicating that firms with a more flexible (less concentrated) debt structure use lower levels of leases relative to debt levels. I document that higher asset redeployability amplifies the inverse relation between debt granularity and operating leases. These results are consistent with a firm using leases less relative to debt when the debt structure is more flexible, especially when the firm's asset redeployability is high.