Two Essays on Leverage, Mergers and Acquisitions, and Institutional Investors
Chung, Chune Young
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In the first essay of my dissertation, I study how bidders' appetite for financial and operating (expected and unexpected) leverage of targets affects merger activities, and whether this appetite varies through the business cycle. I document evidence that bidders have a time-varying appetite for targets' leverages through the business cycle. The effect of financial and operating leverage on the likelihood of becoming a target of a takeover, likelihood of becoming an acquirer, the takeover premium, the announcement CARs of bidders, and long-run BHARs of bidders all depend on the business cycle. The time-varying effects of leverage on merger decisions are consistent with the time-varying benefits of financial and operating leverage, and uniquely capture the well-known time-varying risk in corporate investments.In the second essay of my dissertation, I examine the simultaneous associations between institutional ownership and capital structure of a firm. I find that a firm's leverage decreases when institutional ownership increases. This result implies that a firm reduces its debt level as institutional monitoring substitutes for the external debt monitoring, and indirectly suggests institutional investors' activism. More importantly, I also find that a firm's suboptimal leverage (or value-decreasing debt policy) decreases when the institutional ownership increases, and institutional ownership decreases when a firm's suboptimal leverage increases. This finding directly shows that institutional investors not only actively monitor the management but they also passively sell their shares when dissatisfied with the management. In addition, I find that the monitoring evidence on a firm's leverage and suboptimal leverage are more pronounced when the institutional investors are less likely to go along with the management or the information asymmetry is high.