Essays on corporate finance

This dissertation addresses issues in corporate finance. Part I examines the litigationenvironment of a firm and its impact on financial policy. Chapter 1 discusses prior research,including theory and empirical results, related to firm performance, financial policy, andlitigation. It provides the background to support the empirical analyses of Chapters 2 and3. Chapter 2 examines the wealth effects of litigation events on the firms involved, as wellas on their industry peers. I find that litigation events have a strong negative effect on boththe firms sued, as well as their competitors. Chapter 3 examines whether managers usefinancial policy strategically when facing an increased risk of litigation claims. I find thatgreater litigation exposure leads firms to choose higher leverage. I show that this leverageincrease is brought on by an active decision to repurchase shares. These repurchases appearto be financed with a combination of excess cash and short term debt as they coincide with asignificant decrease in cash holdings and an increase in short term liabilities. These firms alsoincrease their use of operating leases, which, due to their priority in bankruptcy, have similarcharacteristics as secured debt. Finally, the effects seem to be stronger for firms with a higher probability of bankruptcy. Part II asks whether there is a disposition effect in corporateinvestment decisions. Chapter 4 provides a summary of the existing literature related to thedisposition effect and discusses both theoretical and empirical findings. In Chapter 5, I utilizethe unique nature of Real Estate Investment Trusts (REITs) to test for the presence of thedisposition effect in corporate investments. The results show strong statistical evidence thatREIT managers tend to sell winners and hold losers, where winners and losers are definedusing changes in properties’ prices since they were acquired. In addition, I find evidencethat this behavior is consistent with the disposition effect. REIT managers are significantlyless likely to sell properties that have a loss relative to a reference point based on inflationor historical average returns, controlling for the properties’ recent returns.