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Corporate policies and asset prices

Pazaj, E. (2020). Corporate policies and asset prices. (Unpublished Doctoral thesis, City, University of London)

Abstract

This thesis analyzes the interconnections between corporate policies and asset prices that arise under imperfect capital markets. The magnitude of financial frictions and uncertainty about their future value affect optimal decisions regarding investment, cash savings, financing, payout, and ultimately, valuations. Recognising these effects can help our understanding of return behaviour deemed anomalous under standard asset pricing theory. In turn, we can utilize price data for precise measurement of the frictions. The thesis is based on three papers. The first paper sheds further light on the documented link between earnings and price momentum. I provide evidence that both permanent and transitory shocks contribute to fluctuations in the earnings of momentum firms. I show, theoretically and empirically, that financial constraints can explain the surprisingly large price impact of transitory shocks for momentum firms. The second paper provides a mechanism for value and momentum premia that is driven by the valuation effects of optimal corporate policies under uncertain financing conditions. Time-series variation in the cost of issuing equity leads to a procyclical momentum premium and a countercyclical value premium, consistent with the data. The model can also explain the performance of the two premia during market rebounds as well as the time-series behaviour of their correlation. Finally, the goal of the third paper is to estimate the variation of equity floatation costs, both over time and in the cross-section, at a high level of granularity. Equity issuance is measured based on the daily variation in shares outstanding. This measure identifies issuance events and allows us to exploit data moments related to the quantity issued, its timing and the price reaction, all of which are highly informative of the costs. The estimated model is useful for quantifying the importance of the market timing motive for financing policy.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
Departments: Business School
Business School > Finance
Doctoral Theses > Business School Doctoral Theses
Date Deposited: 14 Aug 2020 10:26
URI: https://openaccess.city.ac.uk/id/eprint/24756
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