Implications of lump sum costs for empirical design in corporate finance
      research
Creators: name: Zhai, Qifan
Publisher: name: Lancaster University
Year: 2018

description: This thesis consists of two self-contained studies on the implications of
      lump sum costs for empirical design in the context of corporate finance.
      The first study analyzes the dynamics of cash holding management and
      empirically determines the optimal policy for cash reserves. The framework
      stipulates that cash management is associated with the following actions:
      1) allow cash level to freely float within the range bounded by two
      barriers; 2) refinance back to the target value immediately when cash
      level hits either barrier. The endogenous pattern identified under this
      framework facilitates understanding of the dynamics of cash holdings since
      it allows to estimate both the triggers of cash adjustments, as well as
      the target of each component of the policy. Further, this empirical
      application emphasizes the importance of the adjustment cost setting which
      refers to the interpretation of cost types for cash refinancing (fixed or
      fractional). In our model, we allow both fixed and fractional cash
      adjustment cost, which allows to identify a number of dynamic aspects such
      as target and thresholds in liquidity management. Also, this study
      enriches the existing studies of determinants of cash holdings by
      demonstrating novel effects of covariates on target cash holdings such as
      the negative impact of cash flow (profitability) much larger than
      previously estimated effects of industry risk. These findings differ from
      those in existing studies, either in signs or in magnitude, but are fully
      consistent with the underlying theory. Overall, the presented research
      quantifies cash holding management in a dynamic double-barrier model,
      allows to estimate the trigger of cash refinancing, and hence enhances our
      understanding of determinants of cash holding policy.
      
      The second study investigates the stickiness in credit rating. The
      existing literature on credit ratings typically assumes on accurate match
      between credit quality and agency ratings. This assumption ignores the
      agencies’ trade-off between the reputation among investors and the revenue
      from issuers when updating credit ratings. Our model controls for the
      adjustment cost for rating agencies, and hence explains the stickiness
      embedded in rating assignments. Presented tests empirically demonstrate
      the existence of the stickiness and its significant impact. This is the
      first study to explicitly model decision (partial) irreversibility in
      credit rating research. This paper offers therefore a different
      explanation of the observed rating deterioration to the upgrades becoming
      increasingly difficult. Lastly, this study personalizes the standard
      ordered-probit estimation to allow for stickiness (path-dependence). Our
      estimation identifies upper and lower threshold groups in which the credit
      quality does not match assigned ratings, and calculates the likelihood
      specifically based on their features.