Essays on corporate finance and financial institutions
The dissertation consists of four chapters. The first chapter presents a model that incorporates product market competition into the standard neoclassical framework. The model explains why value-maximizing firms conduct mergers that appear to lower shareholder value. In a Cournot setting, the model demonstrates a prisoners' dilemma for merging firms in a merger wave. Consistent with the model's implications, the paper empirically documents that horizontal mergers are followed by substantially worse performance when they occur during waves. Moreover, further empirical tests show that the empirical relation between performance and merger waves is independent of the method of payment and increasing in the acquirer's managerial ownership. These findings are difficult to reconcile with alternative interpretations from existing theories. The second chapter studies the impact of brokerage relations with company insiders on insider-affiliated market makers' quoting behavior and the possibility of information leakage via piggybacking when insiders trade. The paper finds that market makers affiliated with the brokers used by insiders post more aggressive ask quotes vis-à-vis their peers during periods when insiders trade. This aggressiveness is dependent on the management role of the insider and the degree of information asymmetry. The third chapter answers the question whether it is the optimistic analyst or the good analyst (an analyst with superior stock-picking ability) who increases the chance of winning equity mandates for investment banks. The paper documents a positive relation between the performance of an analyst's recent buy and strong buy recommendations and his bank's chance of winning future underwriting mandates. The fourth chapter documents a rent-seeking behavior that accompanies the well-known VC keiretsu effect. Using a sample of 570 mergers between venture-backed companies, the paper finds that deals in which the acquirer and target are backed by a common venture investor are followed by substantially worse stock returns and operating performance for the acquirer, after controlling for an array of deal characteristics.