Three Essays on Corporate Finance: Capital Structure, Venture Capital, and Stock Market
The thesis consists of three empirical essays on corporate finance. In the first essay, we examine the influence of cash flow volatility on firms’ uses of debt maturity and zero-leverage policy in an international context. Using a large international sample, we find that cash flow volatility is positively associated with our measure of debt maturity at less than the 1% level of significance. Relative to unconditional means of debt maturity, a one standard deviation increase in cash flow volatility implies a 2.57% decrease in the probability of firms using long-term debt, a 5.83% increase in the probability of firms using only short-term debt, and an 11.8% increase in the probability of firms using zero-debt. Our results support the screening and the trade-off theories that firms with high cash flow volatility are screened out of the long-term debt market and firms with low cash flow volatility lengthen their debt maturity to moderate expected bankruptcy costs. We also find the qualitatively identical influence of cash flow volatility on debt maturity and zero-debt policy in both advanced and emerging economies.
In the second essay, we investigate the two-directional relationship between venture capital investment and stock market development around the globe. We employ a two-stage generalized method of moments model using an instrumental variable approach to mitigate the potential reverse causality in this relationship across 19 countries from 1997 to 2015. We find that stock market development positively affects future venture capital investment. A one standard deviation increase in stock market capitalization leads to an 0.87% increase in future venture capital investment. Likewise, we find evidence that venture capital investment positively affects future stock market capitalization. However, this effect disappears with the presenceof stock market capitalization’s lags as explanatory variables in the model. Interestingly, we find that venture capital investments from 5 to 7 years are statistically significant and jointly associated with future stock market development at less than the 1% level, which is consistent with the venture capitalists harvestingtheir investments through initial public offerings 5 years or more after investing in a venture.
In the last essay, we explore the influence of venture capital and private equity backing prior to initial public offerings on the listed U.S. firms’ financial policies. We find that, relative to the mean, venture-capital-backed firms have an 18.89% higher cash flow volatility, a 23.12% lower leverage, and a 36.76% higher likelihoodto follow a zero-leverage policy than non-venture-capital-backed firms. In contrast, we find the opposite effects for private equity-backed firms. We also find evidence that the negative effect of venture capital backing on capital structure persists after the initial public offering.