posted on 2017-02-23, 04:35authored byKwok, Wing Chun
Using an extensive sample of US firms over the period 1971-2008, this thesis examines
important factors that are hypothesized to influence corporate decision making, namely: stock
market mispricing; accessibility to external capital markets; and a firm’s life cycle stage. First,
this thesis examines the impact of stock market mispricing on various corporate policies. The
results confirm the findings of Polk and Sapienza (2009) that mispricing affects corporate
investment through the catering channel - the relation between investment and mispricing is
positive. This relation is stronger for firms typified by shorter horizon investors. Stock market
mispricing also influences others corporate policies through the catering channel - firms tend
to rely on cash holdings and debt financing to finance catering investment. The analyses
suggest that debt financing is a primary source of financing, while cash reserves is of
secondary importance.
Second, this thesis explores a new aspect of financial flexibility – namely, the ability of
a firm to adjust its internal and external sources of finance for corporate investment in
response to stock market mispricing. Firms with greater access to external capital markets are
more flexible in adjusting their sources of financing for corporate investment in response to
mispricing. Specifically, firms with greater access tend to have lower (higher)
investment-cash flow sensitivities in situations of overvaluation (undervaluation). In contrast,
the investment-cash flow sensitivity of firms with limited access to external finance is
negligibly affected by the level of mispricing.
Third, this thesis investigates the impact of a firm's life cycle stage on various corporate
policies. Consistent with the notion that mature firms face relatively limited growth
opportunities and have higher accumulated profits, firms tend to reduce investment, become less reliant on external financing, hoard less cash, and pay higher dividends as they mature.
All of the empirical results in this thesis are confirmed by a battery of robustness checks.