Three Essays On Financial Policy Of A Firm

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The first chapter of the dissertation analyzes how characteristics of a firm's brand affect financial decisions by using a proprietary database of consumer brand evaluation. It demonstrates that positive consumer attitude alleviates financial frictions by providing more net debt capacity, as measured by higher leverage and lower cash holdings. Brand perception reduces the overall riskiness of a firm, as strong consumer evaluations translate into lower future cash flow volatility, higher Z-scores, and better performance during recession. Creditors favor strong brands by demanding lower yields on corporate public bonds. The results are more pronounced among small firms and non-investment grade bonds, contradicting a number of reverse causality and omitted variables explanations. The second chapter develops a framework that shows how exactly market timing and trade-off forces coexist. The idea is that market timing benefits dominate trade-off costs when firms are close to their target leverage, but become offset by the rebalancing considerations when firms are farther away. Two sets of empirical results support the validity of the framework. First, the sensitivity of equity issuances to past stock performance is the highest among firms close to the target leverage. Second, the long-run performance of equity issuers is also a function of their deviation from target leverage. The lower the leverage of issuing firms is relative to the target, the worse their after-issuance returns are, consistent with higher market timing incentives compared to other issuers. The third chapter studies whether investors value dividend smoothing stocks differently by exploring the implications of dividend smoothing for firms' expected returns and their investor clientele. First, it demonstrates that dividend smoothing is associated with lower average stock returns in both univariate and multivariate settings. Some of this return differential can be attributed to lower risk, captured by return comovement among high (low) smoothing firms. Second, the chapter shows that institutional investors, and specifically, mutual funds, are more likely to hold dividend smoothing stocks. Last, firms that smooth their dividends issue equity more frequently. Together, these results are consistent with the role of dividend smoothing in mitigating the impact of agency conflicts on the cost of capital.

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financial policy; capital structure; dividends; smoothing; trade-off; market timing; brand percpetion


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Michaely, Roni

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Leary, Mark T
Grinstein, Yaniv
Rao, Vithala R.

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Ph. D., Management

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Doctor of Philosophy

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Government Document




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dissertation or thesis

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