Industry Influences on Corporate Financial Policies

This thesis examines how industry differences affect both corporate financial policies and valuation. Chapter 1 studies the impact of a firm‟s product market power, through the channel of business risk, on its dividend policy. Using three measures of market power – the Herfindahl-Hirschman index, the degree of import competition and the Lerner Index, I find that market power positively affects a firm‟s dividend decision, both in terms of the probability of paying a dividend and the amount of the dividend. I also provide evidence that the route through which market power affects the dividend decision is business risk: a firm with greater market power is less risky and hence more likely to pay dividends and pay more dividends. Chapter 2 examines industry differences on the level of corporate cash holdings since the 1970s with a focus on high-tech versus non-high-tech firms. In contrast to the average cash-to-assets ratio of non-high-tech firms, which remained stable at a level close to that of the 1970s, the average cash ratio of high-tech firms more than tripled from 1980 to 2007. I find that this difference can be explained by changing firm characteristics across these two industrial sectors. This is due to high-tech new listings, whose changing characteristics and increasing proportion have caused the population characteristics of the high-tech sector to tilt toward those typical of firms that hold more cash. Chapter 3 investigates the industry impact on the marginal value of corporate cash holdings and how it has evolved over time. I find that on average the difference in the marginal value of cash between high-tech and non-high-tech firms has become larger during the sub-period which covers the 1990s and 2000s, as compared to earlier time periods. Furthermore, I show that this increase can be explained by changing firm characteristics related to the precautionary demand for holding cash. Overall, this thesis shows that industry differences, represented by varying degrees of market power and changing firm characteristics, have significantly affected corporate financial policies, both in terms of dividend policy and optimal cash holdings.