ESSAYS IN EMPIRICAL CORPORATE FINANCE AND INSTITUTIONAL OWNERSHIP

Abstract

My dissertation consists of two chapters which explores various aspects of empirical corporate finance and institutional ownership. In the first chapter, I examine whether common owners – an institution with holdings in both the distressed and the lending firm – ameliorates this conflict given that common owners should seek to maximize the equity value of both firms. The results show that when a common owner holds a stake in both the borrowing and lending firm, distressed firms are over 3.3-times more likely to file for Chapter 11 freefall bankruptcy (rather than prepack) as compared to borrowing-lending firms without a common owner. Using ownership of passive funds as an instrument for the presence of a common owner, I provide evidence of a causal relation between common ownership and bankruptcy filing choice. Overall, the analysis indicates that common ownership in both financially distressed borrowing firms and their lending firms leads to a greater likelihood of Chapter 11 freefall bankruptcy filing; suggesting that common owners typically side with creditors to maximize their combined equity value in both the borrowing and lending firm. Next, I examine the effect of CEO social connections on stock returns. An equally weighted (value weighted) long-short portfolio strategy earns investors excess returns of 5.39% (4.44%) per year. Three potential reasons explain the relation between CEO social connections and excess returns; better firm performance, investor information asymmetry, and/or greater investor risk-bearing. Our analysis provides evidence consistent with CEO connections both increasing firm risk and improving firm performance.