Three essays in corporate finance

The first essay shows that political capital is an important determinant of corporate investment and innovation. Using the unexpected exits of legislators from the U.S. Congress as exogenous shocks to politically connected firms' political capital, I find that losing a political connection induces a firm to increase its capital expenditure, R&D investment, and patent production. Surprise losses of political capital result in significant negative announcement returns, as well as significant declines in sales to the government. On the other hand, the competitors of a firm that loses its political capital experience significant increases in total sales and sales to the government. Overall, the findings suggest that political capital serves as a substitute for physical capital. This substitution can arise from an industry equilibrium in which political capital can be used to maintain a competitive advantage. The second essay studies the causal impact of public sector's spending on private sector's investment. Based on the fact that federal funds allocated to states and counties are largely dependent on the local population level, we use population count revisions in decennial census years as exogenous shocks to the cross-sectional allocation of federal funds. We document strong evidence that exogenous increases in the federal spending reduce both firms' capital and R&D investment. This contraction in investment is accompanied by a decrease in employment growth as well as a decrease in sales growth. The effect of government spending is more pronounced among firms that are smaller-sized, more geographically concentrated, and located in regions with higher employment rate. Furthermore, we find direct evidence that an exogenous increase in government hiring and wage spending reduces subsequent corporate employment growth. Taken all together, the evidence we present is consistent with the crowding out effect of government spending, not through the traditional interest rate or tax rate channel, but through the labor channel. The third essay finds that the incentive structure of the acquirer's management is an important source of agency costs in M&A activities. When an acquirer's executive worked at the target firm in the past, M&A announcement returns of both the acquirer and the target are significantly lower than M&A announcement returns without such ties. The negative effect on M&A announcement returns is stronger when the tie between the acquirer's executive and the target firm is stronger, as measured by the executive's ownership of the target firm when the connected executive left the target firm. This paper provides evidence that the private benefit and preferences of the acquirer's management affect corporate takeover decisions, which results in merger decisions that are unlikely to be in the minority shareholders' best interest.U of I OnlyBy request of the author, approved by graduate college. Change made by astein@illinois.edu on 2018-09-18