Essays in financial economics [electronic resource]

This thesis consists of three essays that apply game theory, theory and structural econometrics of auctions, and dynamic programming to study problems in two areas of corporate finance and market design: Dynamic theory of the firm and financial auctions. In the first essay (co-authored with Ilya A. Strebulaev), we investigate corporate financial policies in the presence of both temporary and permanent shocks to firms' cash flows. In our framework cash flows can be negative and are imperfectly correlated with firm value, and earnings volatility differs from asset volatility. These results are consistent with empirical stylized facts. They are also contrary to the implications of existing dynamic capital structure models that allow only for permanent shocks to cash flows. Temporary shocks increase the importance of financial flexibility and may provide an intuitively simple and realistic explanation of empirically observed financial conservatism and low leverage phenomena. The theoretical framework developed in this paper is general enough to be used in various corporate finance applications. In the second essay (co-authored with Andrey Malenko), we study simultaneous security-bid second-price auctions with competition among sellers for potential bidders. The sellers compete by designing ordered sets of securities that the bidders can offer as payment for the assets. Upon observing auction designs, potential bidders decide which auctions to enter. We characterize all symmetric equilibria and show that there always exist equilibria in standard securities or their combinations. In large markets the unique equilibrium is auctions in pure cash. We extend the model for competition in reserve prices and show that binding reserve prices never constitute equilibrium as long as equilibrium security designs are not call options. To study how the market for takeovers operates, it is critical to understand how different potential acquirers shape their valuations, or maximum willingness to pay, for targets. In the third essay (co-authored with Andrey Malenko), we propose a structural model of a takeover auction that allows for asymmetries between strategic and financial bidders. Using a hand-collected data on the number of competing bidders, their types and bids, we estimate the model to recover valuations of participating strategic and financial bidders. Our approach helps overcome the sample selection problem that arises if takeover premia are simply interpreted as average bidder valuations. The results suggest that there are substantial differences between strategic and financial bidders along many dimensions. In particular, strategic and financial bidders value targets with different observable characteristics, and strategic bidders are considerably more heterogeneous than financial bidders. While average valuations of strategic bidders are higher than those of financial bidders, the higher takeover premiums that they pay are mainly driven by their greater heterogeneity. We extend the model to incorporate endogenous participation decisions, and show that strategic bidders appear to have considerably higher average participation costs than financial bidders, especially so if the target is highly valued by them or operates in a hi-tech industry.

Advisor: Strebulaev I. A. (Ilʹi͡a Alekseevich) primary advisor. Thesis advisor
DeMarzo Peter M. advisor. Thesis advisor
Zwiebel Jeffrey advisor. Thesis advisor