Three essays in corporate finance

Abstract

The first chapter of this dissertation studies the relationship between firm age and the diversification discount. The second and third chapters analyze how firms use the proceeds of their stock offerings. In particular, the second chapter shows that when the valuation of the stock market is high issuing firms are more likely to use the proceeds of their equity offerings to invest in financial investments than during periods of low stock market valuations. The third chapter shows that the funds raised in stock offerings are used primarily to provide issuers with liquidity. In Chapter 1, I find that the growth opportunities of young firms substantially contribute to the negative relationship between Tobin's q and corporate diversification. The growth opportunities of young firms increase the market value of these firms, but not the book value of their assets, yielding an inverse relationship between firm age and Tobin's q. Age explains half of the difference between the Tobin's qs of focused and diversified firms. Furthermore, the negative relationship between Tobin's q and corporate diversification is particularly weak for old firms. Chapter 2 studies the impact of the average stock market valuation of firms on the investment decisions of firms that are issuing equity. In "hot markets," periods of high stock market valuations, issuing firms do not have higher levels of capital expenditures than firms that issue in "cold markets." However, "hot market issuers," firms that issue equity during hot markets, do sell more equity and have higher levels of financial investments than "cold market issuers."

(cont.) I argue that this is evidence that managers' perceived cost of capital is inversely related with the average stock market valuation of firms. Chapter 3 examines the economic role of the proceeds of equity offerings. I find that large equity issuers primarily use the proceeds from their offerings to invest in liquid assets. On average, large equity issuers do not draw down on these reserves to fund real investment in subsequent years. Instead, the proceeds provide issuers with cash reserves that allow them to remain liquid during periods of rapid and uncertain growth.