Three Essays on Empirical Corporate Finance

Abstract

This thesis comprises three standalone essays on corporate finance.

In Chapter 2, we use novel data to track the movements of senior managers and executives across firms to investigate how family business groups allocate human capital within their Internal Labor Markets (ILMs). We show that groups actively leverage their ILMs to source talent. Despite having an overall greater demand for talent, group firms hire significantly fewer executives from the external labor market than comparable standalone firms, and such external hiring only rises in periods of poor performance. Within a group, the reallocation of talent is mainly directed towards younger and bottom-of-pyramid member firms, and those with relatively weaker performance and that receive within-group investments. Overall, our findings imply that family business groups maintain active ILMs, through which critical human capital can be reallocated to support the development of group members.

Chapter 3 examines customer-supplier relationships and trade financing within business groups. We find that business group firms actively trade among themselves and utilize trade financing to assist their affiliates in mitigating operating risks. Compared to standalone firms, group firms trading with suppliers from the same group receive greater trade credit, especially when facing difficult sales conditions and cash shortages. Trade financing is a substitute for direct investment as a way to allocate internal capital within a group, except for the most capital-dependent affiliates, where both channels matter. An identification strategy based on major natural disasters strengthens the causal interpretation of our main results.

Chapter 4 explores the role of firms' ownership and common ownership by institutional investors in shaping firms' product market strategies. Using comprehensive trademark data, we find that institutional ownership encourages the more frequent introduction and removal of product lines, resulting in the firm's product scope expansion. Using exogenous industry shocks, we present causal evidence that institutional investor distractions discourage product scope expansion and product shifting. Our findings support the career concerns' hypothesis that institutional investors alleviate managers' concerns over short-term performance fluctuations due to changes in the product mix. We find little evidence to support the anticompetitive effects of common ownership on firms' product market strategies.