Three Essays in Corporate Finance

Abstract

This thesis comprises three essays in corporate finance, broadly encompassing the impact of CEO characteristics and their ability to efficiently use firm resources on financial policy and decision-making. The first essay examines the role played by CEO characteristics in managing a firm’s predation risk. Predation occurs when competing firms aim to force an opponent to exit the market by engaging in predatory actions by price reductions or increased non-price competition expenditure such as advertising. Our results show that firms led by overconfident, empire-building CEOs significantly reduce their predation risk by diversifying their operations to become more dissimilar than their industry competitors. We use the random, exogenous passage of large US import tariff reductions and CEO deaths as quasi-natural experimental settings to address endogeneity concerns. We demonstrate that reduction of predation risk through CEO characteristics leads to significant growth in a firm’s market share over industry competitors and higher total compensation and option grants for the CEOs. These empirical results offer a crucial insight into how CEO behavioural characteristics play a role in a firm’s survival in competitive product markets against predatory threats. The second chapter investigates how major customer firms (identified as representing more than 10% of a supplier’s revenue) managed by higher ability managers gain significant bargaining power over their network of suppliers. Using a composite index capturing a customer’s supply chain power and the Demerjian (2012) measure of managerial ability that considers the efficient use of firm resources, we provide evidence that higher ability managers in major customer firms hold significant supply chain power over their suppliers. We use two-stage least squares (2SLS) regressions using instrumental variables and difference-in-differences estimates surrounding forced CEO turnovers to address endogeneity concerns. This positive association is stronger for higher ability managers who engage more in socially responsible activities and have better corporate innovation performance. Suppliers are found to extend greater trade credit when customers managed by higher ability managers have more supply chain power. The third chapter explores how firms managed by executives with superior ability can extract greater trade credit from their suppliers. Trade credit is one of the most used sources of liquidity for inter-firm commerce. Using the Demerjian (2012) measure for managerial ability and two proxies for trade credit, we document a positive association between managerial ability and the trade credit received by a firm. Two-stage least squares (2SLS) regressions using instrumental variables are used to mitigate endogeneity concerns. We identify that engagement in socially responsible activities by higher ability managers acts as a channel that drives the relationship between trade credit and managerial ability. Cross-sectional variation analysis demonstrates that this positive association is stronger for superior managers in firms identified as major customers (representing 10% or more business revenue of a suppliers) and during periods of economic recession. Further robustness tests demonstrate that higher ability managers use this trade credit to outgrow their industry competitors and improve their product market performance, while preserving cash in hand by reducing trade receivables. These findings emphasize the role of managers in efficiently managing resources to access more trade credit for the firm’s business operations.