Two Essays on Corporate Finance
Yang, Shangfeng Sean
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My doctoral dissertation explores factors that govern managerial decision-making process. In the first essay of my dissertation, coauthorship with Kee H. Chung, we show that both the number of institutional investors and the percentage of shares that are held by institutional investors increase significantly after reverse splits with a pre-split price lower than $5 and a target price higher than $5. This effect is larger than for other comparable reverse splits. These results suggest institutional holdings are affected by the prudent-person rule and reverse splits are used by firms to alleviate this constraint. We also show that an increase in institutional holdings that results from reverse splits is associated with an increase in share price. In the second essay of my dissertation, coauthorship with Kee H. Chung and Inho Suk, we test the market’s informational feedback effects on firms’ seasoned equity offering (SEO) decisions using an important corporate event: earnings announcements. We define the market’s informational feedback at earnings announcements as the component of abnormal returns that cannot be predicted by firm managers ( unpredicted abnormal returns). We find that unpredicted abnormal returns are positively associated with the likelihood of a follow-on SEO and with the size of offer proceeds. Furthermore, firms receiving positive unpredicted abnormal returns experience a lower degree of underpricing at issuance and higher post-issue performance. Finally, unpredicted abnormal returns are positively associated with debt issuance likelihood as well, albeit the effect is weaker than the case in equity offerings. These results support the notion that the market’s informational feedback at the corporate disclosure guides managers towards value-enhancing financing decisions. Our results are not consistent with alternative explanations such as overvaluation-based market timing, earnings management, investment opportunities, leverage, cash needs, and managerial overconfidence.