Exploring the role of mispricing, market access and life cycle in corporate financial decision-making
thesisposted on 23.02.2017, 04:35 by Kwok, 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.