Three essays in corporate finance
According to the trade-off theory, junk-grade that issue debt instead of equity are unusually aggressive in taking on more leverage since they have lower marginal tax rates and higher probability of financial distress, compared to investment-grade firms. In my first essay, I find compelling evidence that in addition to trade-off motivations, junk-grade firms issue debt in an attempt to avoid wealth transfer to existing bondholders. In the second essay, I focus on the foreign capital issuance in India. I examine the benefits of debt and equity issuances to obtain comparative measures of estimates of gain. I inspect the effect of security issuance when the government lifts the barriers following liberalizations. I find that there is a significant positive response to the announcement; abnormal return is related to various firm specific variables including issue size, investment banker, leverage, growth, and cost of capital benefits to the issue. In the third essay, I study mergers in the Indian market following the economic liberalizations. I document some aspects of the opening of a vibrant market for control. I find that the price response in the Indian market is different from those reported in developed markets. In addition, consistent with the literature, I find that large group-affiliated firms have higher announcement returns, and this directly translates into lower target returns. I also find that targets belonging to groups can exploit their affiliations to achieve higher abnormal returns, possibly due to better bargaining power.