Essays in Corporate Finance

Abstract

This dissertation contains three chapters. In the first chapter, which is joint work with Paul Gompers and Steven Kaplan, we survey 79 private equity (PE) investors with combined assets under management of more than $750 billion about their practices in firm valuation, capital structure, governance, and value creation. Investors rely primarily on internal rates of return and multiples to evaluate investments. Their limited partners focus more on absolute performance as opposed to risk-adjusted returns. Capital structure choice is based equally on optimal trade-off and market timing considerations. PE investors anticipate adding value to portfolio companies, with a greater focus on increasing growth than on reducing costs. We also explore how the actions that PE managers say they take group into specific firm strategies and how those strategies are related to firm founder characteristics. The second chapter, co-authored with Efraim Benmelech, Nittai Bergman, and Anna Milanez, identifies a new channel through which bankrupt firms impose negative externalities on non-bankrupt peers. The bankruptcy and liquidation of a retail chain weakens the economies of agglomeration in any given local area, reducing the attractiveness of retail centers for remaining stores leading to contagion of financial distress. We find that companies with greater geographic exposure to bankrupt retailers are more likely to close stores in affected areas. We further show that the effect of these externalities on non-bankrupt peers is higher when the affected stores are smaller and are operated by firms with poor financial health. In the third chapter, using a novel dataset that allows me to capture the education and career trajectories of over 250,000 employees of 224 bank holding companies, I find that banks with shorter employee tenures and higher fractions of MBAs, top school graduates, and job jumpers performed more poorly during the Great Recession. This relationship is driven by the predisposition of these banks to take on greater risk. These same workforce measures also explain banks’ performance in the 1998 crisis. Taken together, my results suggest that investigating workforce measures could be a step towards quantifying components of risk culture or strategy that contribute to financial institutions’ vulnerability to crisis.