Yang, Nan (2015-06). Two Essays on Corporate Finance. Doctoral Dissertation.
This dissertation includes two essays on corporate finance. The first essay investigates why bank debt contracts are frequently renegotiated outside default. I test empirical implications from several theories by looking at bondholder wealth effects in a sample of firms with both bank debt and public bonds in their capital structure. Based on a sample of 321 renegotiations, I find that bondholders react positively to renegotiations that result in relaxation of bank debt covenants. The evidence supports the theory that lenders loosen covenants due to new favorable information of firms' credit quality and is inconsistent with the hypothesis that relaxing covenants signals weakened bank monitoring due to low bargaining power of the banks. I also find insignificant bondholder reaction to renegotiated higher bank loan interest rates. This provides little support to the hypothesis that increased loan interest rate conveys unfavorable news that asset substitution cannot be avoided. The second essay, coauthored with Shane Johnson and Jun Zhang, examines the relationship between CEO inside debt and the maturity of new corporate debt. Following recent theories of incentive alignment effect of CEO inside debt, we include both the magnitude and the maturity of CEO inside debt in empirical estimation. We classify firms as having "debt-biased CEOs" when the ratio of CEO's inside debt to equity compensation exceeds the company's leverage ratio, and "equity-biased CEOs" otherwise. Using a sample of corporate debt issuance during 2007-2012, we find that among firms with long-term inside debt, firms with debt-biased CEOs issue debt with longer maturity than do firms with equity-biased CEOs. Among firms with debt-biased CEOs, the maturity of new debt is longer if CEOs have long-term inside debt than if CEOs have short-term inside debt. In contrast, among firms with equity-biased CEOs, the maturity of new debt is shorter if a CEO has long-term inside debt than if a CEO has short-term inside debt. The results provide support for the overall hypothesis that CEO inside debt affects firms debt maturity structure through its ability to ameliorate stockholder-debtholder conflicts.