Essays on Capital Structure Decisions

goutham abotula

For the first chapter of this dissertation, my coauthor and I investigate the impact of debt maturity dispersion on cash holdings. We find that cash holdings are significantly lower for firms with dispersed debt maturity, and this finding is robust to entropy balancing and allowing for the simultaneous selection of dispersion and cash holdings. The relation is strongest for firms with shorter debt maturity and firms that rely on precautionary cash, such as financially constrained firms and firms with volatile cash flows. Markets place a lower value on the cash of firms with high or increasing dispersion, and these firms retain less cash. Collectively, the evidence implies that firms can hedge rollover risk with dispersed debt maturity as an alternative to holding costly cash.For the second chapter, my coauthors and I examine the value of operating leases as a risk-shifting mechanism using the EPU index. We find that increased EPU leads to greater use of operating leases. This finding is robust to various fixed effects specifications and alternative definitions. Furthermore, to alleviate concerns of omitted variables bias, we employ an instrumental variable analysis to strengthen the causal explanation of our main finding. Moreover, we find that financially constrained firms increase the use of operating leases in the presence of uncertainty. Likewise, we document that firms facing greater industry-level operating volatility will use leases as insurance in the presence of EPU. We also find that the supply of leased capital is higher even with greater uncertainty if contracts are more likely to be enforced. Finally, we document a decrease in the use of operating leases with stronger creditor rights. The incentive to lease decreases with the availability of alternative secured debt financing.

Essays on Capital Structure Decisions

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