Three essays on corporate finance: raising capital, financial constraint and value of cash
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Date
2021
Authors
Song, Xiaoping
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Abstract
The thesis consists of three essays. In the first essay, we examine whether alleviating financial constraints is one of the motives for non-U.S. firms to cross-list in stock markets in the United States. Using payout ratio, payout level, and WW index (Whited and Wu, 2006) as measures of financial constraints, we find that firms with higher financial constraints are more likely to cross-list in the U.S. This pattern is driven by small firms, which tend to be financially constrained. After firms cross-list, they significantly increase their payout ratio and payout level. Small firms have more increases in payouts than large firms. WW index decreases for small firms after cross-listing. Tests about cash flow sensitivities of cash also suggest that the decline in financial constraints is more significant for small firms. Overall the results suggest that relief from financial constraints may be an important motive for cross-listing, especially for small firms.
In the second essay, we investigate the level of cash holdings of IPO firms in the year of IPO issuance assuming the IPO proceeds are not received. The results show that more than 70% of IPO firms will run out of cash if they do not receive IPO proceeds, indicating that near-term cash shortage is probably a common phenomenon for IPO firms prior to IPO issuance. We next examine whether the near-term cash shortage is correlated with post-IPO long-run underperformance and find that the near-term cash shortage will negatively and significantly affect the post-IPO long-run performance. The IPO firms with higher level of cash shortage underperform more than IPO firms with lower level of cash shortage or without cash shortage, consistent with the market underreaction hypothesis. Further tests also suggest that near-term cash shortage is negatively and significantly correlated with post-IPO operating performance.
Faulkender and Wang (2006)’s study about the value of cash holdings may be subject to endogeneity problem and under-reaction problem. In the third essay, I investigate the marginal value of cash holdings using a sample of cash windfalls for oil-and-gas firms during 2000-2007. This sample avoids the endogeneity problem to a large extent. The results indicate that on average one extra dollar of cash is worth much more than what Faulkender and Wang (2006) suggest. Tests about future stock performance suggest that while the under-reaction problem may cause Faulkender and Wang (2006) to underestimate the marginal value of cash, our method does not suffer from the same issue.
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Keywords
Raising capital, Value of cash, Financial constraint