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Abstract
This thesis consists of three studies investigating the role of institutional environments in international corporate finance.
The first study examines the effect of firm's crash-risk exposure on speed of leverage adjustment (SOA) and the way this effect is influenced by information environments. By employing a large panel of 19,247 firms from 41 countries, and spanning the years 1989 to 2013, this study finds that firms exposed to a higher crash risk tend to adjust their financial leverages towards targets more slowly. The empirical evidence supports the pecking order theory and the dynamic trade-off theory. In addition, the documented negative association between crash-risk exposure and SOA is found to be attenuated by strong information environments.
The second study examines the effect of earnings management on financial leverage and how this relation is influenced by institutional environments. By employing a large panel of 25,798 firms from 37 countries, and spanning the years 1989 to 2009, this study finds that firms with high earnings management activities are associated with high financial leverage. More importantly, this positive relation is attenuated by strong institutional environments. The results lent strong support to the notions that 1) both corporate debt and institutional environments can be served as external control mechanisms to alleviate the agency cost of free cash flow; and 2) it is less costly to rely on institutional environments than on debt. After carefully addressing the possible endogeneity issues and conducting various robustness tests, the main conclusions remain confirmed.
The third study examines the role of national culture as an informal-institutional setting in influencing acquisition choices, by employing 176,548 firm-year observations (including 18,792 acquisitions) from 33 countries, and spanning the years 1990 to 2012. Using Hofstede's three cultural dimensions (i.e., power distance, collectivism / individualism, and uncertainty avoidance) as national-culture proxies, the results show that firms located in countries embedded with high power distance, high collectivism, and high uncertainty avoidance are less likely to undertake acquisitions. Further, such firms are more likely to acquire small target firms, and pay lower premiums to target firms. This suggests that in addition to the role of formal institutions, national culture plays an important role in explaining cross-country variations in acquisition choices.