University of South Carolina Scholar Commons Theses and Dissertations 2017 Three Essays on Capital Structure and Product Market Interactions Ying Zheng University of South Carolina Follow this and additional works at: https://scholarcommons.edu/etd Part of the Business Administration, Management, and Operations Commons Recommended Citation Zheng, Y. Three Essays on Capital Structure and Product Market Interactions. Retrieved from https://scholarcommons.edu/etd/4117 This Open Access Dissertation is brought to you by Scholar Commons. It has been accepted for inclusion in Theses and Dissertations by an authorized administrator of Scholar Commons.
For more information, please contact digres@mailbox. THREE ESSAYS ON CAPITAL STRUCTURE AND PRODUCT MARKET INTERACTIONS by Ying Zheng Bachelor of Science East China University of Science and Technology, 2010 Master of Science Bentley University, 2012 Submitted in Partial Fulfillment of the Requirements For the Degree of Doctor of Philosophy in Business Administration Darla Moore School of Business University of South Carolina 2017 Accepted by: Omrane Guedhami, Major Professor Chuck C. Kwok, Major Professor Allen N. Berger, Committee Member Kee-Hong Bae, Committee Member Sadok El Ghoul, Committee Member Cheryl L.
Addy, Vice Provost and Dean of the Graduate School © Copyright by Ying Zheng, 2017 All Rights Reserved. ii DEDICATION This work is dedicated to: My husband, Yi Shen My parents, Dianzeng Zheng & Lingping Duan My parents-in-law, Jin Shen & Xiaomei Song I love you all iii ACKNOWLEDGEMENTS My journey at University of South Carolina is truly unforgettable, precious, and inspiring. During this journey, I have received generous support from many talented professors and friendship from bright individuals. Firstly, I would like to express my gratitude to my committee co-chairs.
Chuck Kwok gave me continuous support of my PhD study with great patience, motivation, and immense knowledge. His guidance helped me find a big picture of my research interests and get to learn the beauty of teaching. Omrane Guedhami provided me with many wise suggestions on my career and diligently worked on my dissertations. I especially want to thank his endless help during my down time.
His support led to a smooth transition of my career. Besides my advisors, I would like to thank the rest of my dissertation committee. Allen Berger is always willing to support the junior scholar. I thank him for his generous help of my dissertation and job market search.
Kee-Hong Bae is a truly insightful and knowledgeable scholar. I am impressed by his sharp mind and learn a lot after every conversation with him. Sadok El Ghoul has immense knowledge in both data analysis and finance theories. My dissertation would not be possible without his code guidance and theoretical inspiration.
My sincere thanks also go to Dr. Chao Jiang, for his advice on works as a junior professor, Dr. Jean Helwege, for her excellent explanation of corporate finance and her role model as a leading female scholar. I’m also thankful to all professors who have taught iv me.
The classes are undoubtedly the foundations of my future academic career. In addition, I extend my deep appreciation to my friends at University of South Carolina – Zhongyu Cao, Ruiyuan Chen, Chia-Chun Chiang, Ashleigh,Eldemire-Poindexter, Minjie Guo, Xinming Li, Kun Liu, Yuqi Peng, Helen Wang, Jiawei Wang, Herman Saheruddin, Pengxiang Zhang, Shenying Zhang, Yijia Zhao, Xiaoying Zheng, and Yaqin Zheng. I also thank my lovely cats, Madonna and Bubu, for their companionship. Finally, I would like to give my most special thanks to my family.
My parents, Dianzeng Zheng and Lingping Duan, give their unconditional love and support all the time. I often joke with them that they are not “wise” investors. They provide me with substantial supports in time, care and finance, but never ask for returns. My parents-in-law, Jin Shen and Xiaomei Song, shared a lot of extremely valuable suggestions on my PhD study.
They stand by me whenever I face difficulties in life. My husband, Yi Shen, is the best husband I can imagine. The luckiest thing in my life is to get to know him. He is talented, funny, and caring.
Our love is built after high school and since then he is the driver of my life and career. The journey with him is full of happiness as he always protects me from hardness or anything may negatively influence me. I cannot imagine a life without him. v ABSTRACT Capital structure can have important consequences for firm value.
High leverage increases firms’ probability of bankruptcy, and is shown to be the primary cause of financial distress. As suggested by a strand of literature on capital structure and product market interactions, high leverage is costly because financial weakness could induce unfavorable actions by product market participants such as customers and competitors. While the costs of high leverage are well documented in the extant literature, little is known on the factors that influence the costs of high leverage. This dissertation addresses this gap in the literature by examining how the costs of high leverage, measured by the sensitivity of firm sales growth to high leverage, are influenced by corporate social responsibility (CSR), creditor rights, and national culture.
The first essay examines the relation between CSR and the costs of high leverage. We find that CSR reduces losses in market share when firms are highly leveraged. Our main evidence persists when we use regression of discontinuity design (RDD) and difference-in-difference (DID) to address endogeneity. We also examine whether CSR separately mitigates the high leverage costs driven by customers and competitors.
We find that CSR helps high-leveraged firms retain customers and guard against rival predation. Our results support the stakeholder value maximization view of CSR. vi The second essay examines the impact of creditor rights on the costs of high leverage. We find that strong creditor rights increase the costs of high leverage.
This result lends support to the dark-side effects of strong creditor rights when a firm is highly leveraged. The negative impact of creditor rights on high leverage costs is more pronounced for the types of creditor protection that drive creditors’ hold-up incentives as well as for firms located in countries with developed banking system (rather than bond market system), and firms with higher liquidation costs. When we explore the dark-side effects of creditor rights on specific players, we find that strong creditor rights intensify the adverse responses of customers and competitors. In an additional analysis, we find that creditor rights intensify the adverse responses of employees.
Overall, our findings contribute to the debate on the role of creditor rights and shed light on the channels underlying the dark-side effects of creditor rights. The third essay examines how national culture (specifically collectivism) influences the costs of high leverage. We find that these costs are mitigated in collectivist countries through two potential channels of influence: tight group structures and mental conditioning. This relation is stronger where high leverage costs are more pronounced and where legal systems are less developed.
We extend our analysis to include employee and supplier stakeholder groups and find that collectivism helps highly leveraged firms retain employees and obtain trade credit from suppliers. Collectively, our findings suggest that national culture affects corporate financial outcomes by simultaneously influencing key stakeholders in the firm and its environment. vii TABLE OF CONTENTS DEDICATION. vi LIST OF TABLES .x CHAPTER 1 DOES CORPORATE SOCIAL RESPONSIBILITY REDUCE THE COSTS OF HIGH LEVERAGE? EVIDENCE FROM CAPITAL STRUCTURE AND PRODUCT MARKETS INTERACTIONS .2 SAMPLE, MAIN VARIABLES, AND EMPIRICAL DESIGN .34 CHAPTER 2 THE DARK-SIDE EFFECTS OF CREDITOR RIGHTS: EVIDENCE FROM CAPITAL STRUCTURE AND PRODUCT MARKETS INTERACTIONS .2 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT .3 DATA AND VARIABLES .78 CHAPTER 3 COLLECTIVISM AND THE COSTS OF HIGH LEVERAGE .2 RELATED LITERATURE AND HYPOTHESIS .3 SAMPLE, VARIABLE, AND EMPIRICAL DESIGN .161 APPENDIX A – CHAPTER 1 MSCI ESG STATS .172 APPENDIX B – CHAPTER 1 VARIABLE DEFINITIONS .174 APPENDIX C – CHAPTER 2 SAMPLE CONSTRUCTION .176 APPENDIX D – CHAPTER 2 VARIABLE DEFINITIONS .177 ix LIST OF TABLES Table 1.1 Sample Distribution by Industry and Year .2 Descriptive Statistics and Correlation Matrix .3 CSR and the Costs of High Leverage .4 Endogeneity Tests: Regression of Discontinuity Design (RDD) .5 Endogeneity Tests: Exogenous Shock of Import Tariff Reduction .6 CSR and the Costs of High Leverage: Customer Channel .7 CSR and the Costs of High Leverage: Competitor Channel .3 The Dark-side Effect of Creditor Rights.4 Endogeneity Tests: Exogenous Shock of Financial Crisis .5 Endogeneity Tests: 2SLS and System GMM Approaches .6 Robustness Checks: Sample Composition .7 Robustness Checks: Alternative Definitions of Key Variables .9 Channels of The Dark-side Forces of Creditor Rights: Customer and Competitor .10 Additional Channels of the Dark-side Forces of Creditor Rights: Employee and Supplier .11 Alternative Explanation: Creditor Rights and Firm Performance .2 Collectivism and the Costs of High Leverage .3 Subsample Tests: the Costs of High Leverage .4 Subsample Tests: Legal Environment .5 Collectivism and Prevalence of Business Group .6 Collectivism and the costs of high leverage: drop countries according to the rank of business group prevalence .7 Collectivism and Value Traits .8 Collectivism and the costs of high leverage driven by employees and suppliers .10 Robustness Tests: Sample Composition and Alternative Measures .11 Robustness Tests: Firm Exit Bias .12 Robustness Tests: Market Structure Explanation .157 xi CHAPTER 1 DOES CORPORATE SOCIAL RESPONSIBILITY REDUCE THE COSTS OF HIGH LEVERAGE? EVIDENCE FROM CAPITAL STRUCTURE AND PRODUCT MARKETS INTERACTIONS 1.
INTRODUCTION Research on capital structure and product markets interactions documents significantly negative effects of high leverage on product market performances (e., Opler and Titman, 1994; Campello, 2003, 2006). However, very little attention is paid to the mechanisms that may mitigate high leverage costs. In this paper, we fill this gap in the literature. We argue that corporate social responsibility (CSR) can mitigate the negative impact of high leverage on product market performances.
Our study offers insights into the potentially important role of CSR in reducing the costs of high leverage due to a firm’s conflicts with its stakeholders such as customers and competitors. Stakeholders can impose significant costs on highly leveraged firms. For instance, high leverage leads to substantial losses in market share due to unfavorable actions by customers and competitors. Customers are reluctant to purchase from highly leveraged firms because these firms may renege on implicit contracts with customers by discontinuing product support or reducing product quality (Titman, 1984; Maksimovic and Titman, 1991; Matsa, 2011; Kini et al.
Competitors may undertake predatory 1 attacks such as capital-intensive promotion activities (e., negative advertising campaigns, deep price discounts) against highly leveraged firms. As highly leveraged firms have difficulty accessing capital and face high cost of capital, they have less ability to withstand predatory attacks from competitors and can be forced to surrender substantial market share (Telser, 1966; Bolton and Scharfstein, 1990; Chevalier, 1995).1 We hypothesize that CSR plays a risk management role by protecting firms from stakeholders’ unfavorable reactions in response to high leverage and thereby reduces the costs of high leverage. There are at least two reasons for this. First, CSR is associated with a halo effect (Hong and Liskovich, 2015; Lins et al., 2017) that increases trust between a firm and stakeholder groups such as customers.
The halo effect of CSR provides a highly leveraged firm with insurance-like protection that tempers negative actions from customers and reduces competitors’ incentives to exploit a highly leveraged firm’s weak financial position. Second, high-CSR firms are perceived to have lower levels of risk (e., lower litigation risk) and have a wider investor base (Waddock and Graves, 1997; Hong and Kacperczyk, 2009; El Ghoul et al. 2 These firms thus have better 1 In this paper, we follow Freeman (1984) and define stakeholders as “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (Freeman, 1984, p. Accordingly, we classify both customers and competitors as stakeholders.
2 Waddock and Graves (1997) argue that firms attempting to shift costs to external stakeholders through socially irresponsible actions face a higher likelihood of future explicit claims. Hong and Kacperczyk (2009) document that “sin” firms (i.