Essays on corporate finance, capital investment and inventory investment

Abstract

This thesis examines the interaction between the financial market and corporate investment on capital and inventory. Chapter 1 develops and tests the hypothesis that privately held companies learn from the stock market when making capital investment decisions. Using a large panel data set for the United Kingdom, we find that private firms’ investment responds positively to the valuation of public firms in the same industry. The sensitivity is stronger in industries in which the stock prices are more informative or firms are more likely to face common shocks. To address the concern that unobserved factors in the managers’ information set affect both private firms’ investment and industry valuation and generate a spurious relationship even in the absence of learning, we further show that the investment of private firms in the industry leaders’ major-segment industry reacts strongly to the valuation of industry leaders’ unrelated minor-segment industries. These findings are consistent with our model in which the stock market has real effects on the private sector through an information-spillover channel: Private firm managers exploit information contained in the stock prices, but cannot completely filter out the irrelevant information. Chapter 2 studies how financial constraints affect firms’ inventory investment behavior. Financially more constrained firms hold substantially more inventory than do financially less contrained firms and also show much more volatility in inventory holdings. To understand why, we model the interaction of financial constraints, capacity constraints, and the response of production and inventory to cost shocks. We develop several implications as to how financial constraints affect the inventory response to cost shocks of constrained firms relative to unconstrained firms, which cannot be derived from any of a host of other ways in which two groups of firms are differentiated in our model. We find very consistent results when we take these implications to the real data.

Date of Award	2015
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology