My doctoral research
My research interests include the implications of lumpy investment for the study of financing patterns, financing patterns during an investment spike or a year with unusually large investment activities, the heterogeneity of financing patterns during an investment spike, and long-run leverage adjustment patterns after an investment spike, with a particular focus on the effect of share liquidity and firm size. Throughout my doctoral studies, I have produced the following three working papers:
1. “Does Liquidity Increase Propensity to Raise Debt Finance?” (Job Market Paper)
In my job market paper, I investigate the relation between share liquidity and the propensity to raise debt finance, finding that high-liquidity firms have a higher propensity to raise debt finance. Using an empirical specification designed to make a clear distinction between share liquidity as a determinant of target leverage and share liquidity as a determinant of abnormal borrowing at the time of an investment spike or a year with unusually large investment activities, this paper shows that share liquidity has a positive effect on abnormal borrowing at the time of an investment spike, controlling for various firm characteristics, industry effects, and year effects. This result is robust to a control for the effects of various firm characteristics, the use of various leverage measures, and the use of a whole sample with investment spike characteristics. The underlying channels from which the empirical findings derive are then investigated. The paper also shows that this is driven by the spillover of information produced in the stock market into the debt market, reducing the cost of debt capital for high-liquidity firms. These findings are consistent with the real-life observation that an equity market star is usually a debt market star as well. This study also identifies a puzzle regarding inconsistent liquidity effects in static and dynamic leverage models and resolves it, as well as outlining some practical implications regarding the management of liquidity and debt level.
2. “Investment Spikes and Financing Patterns”
In this paper, I show that the summary statistics of financing patterns exaggerate the importance of internal resources in financing investment if filtering techniques are not used when investment is lumpy. This paper finds that the financing patterns of firms at the time of an investment spike are very heterogeneous. First, large firms tend to use relatively more debt finance with little contribution from equity finance at the time of an investment spike, whereas small firms tend to use a substantial amount of equity finance at the time of an investment spike. Second, small firms tend to issue equity quite frequently throughout the periods around an investment spike, whereas large firms tend to buy back shares in normal periods. I also investigate whether the choice of filters has a significant impact on the financing patterns, finding that there are no significant differences in the financing patterns when different filters are used. I was awarded the Best Paper Award at the Oxford-Cambridge-Warwick Spring Doctoral Conference 2010 (held at the Judge Business School at the University of Cambridge) for this paper.
3. “Lumpy Investment and Filtering Techniques”
In this paper, I propose the use of the Markov-switching filter to identify investment spikes or years with large investment events. I apply a Markov-switching mean model to de-trended investment rates and use the Gibbs-sampling algorithm to estimate unobserved state variables and model parameters. The filter has two key advantages: first, the probability of the unobserved investment spike state is used to identify investment spikes and, second, it can be used to identify multi-year investment spikes. This paper finds that about 83% of firms have lumpy investment and that, using a novel approach, firms which are a priori financially constrained are more likely to have lumpy investment. I am currently investigating whether financial crises or financial cycles in general have an impact on the incidence of investment spikes. This paper was awarded the Best Paper Award at the Winter Doctoral Conference 2010 held at the Saïd Business School, University of Oxford.
Future research plans
I am interested in studying various issues related to the interaction of the equity market and corporate behaviours related to investment, financing, and payout decisions. Currently, two projects are in progress.
4. “Share Liquidity and Capital Structure Adjustment”
First, I am investigating whether the liquidity of shares has an impact on the target adjustment behaviours of leverage, i.e. whether share liquidity affects the speed of leverage adjustment. Although this project is at an early stage, I have observed that there are conflicting theoretical predictions on the effect of share liquidity on the speed of leverage adjustment. A pilot study shows that firms with liquid shares tend to have a lower speed of adjustment, which seems to be consistent with the “liquidity-augmented trade-off theory of debt”. The empirical model used to estimate the speed of adjustment is a reduced-form partial adjustment model (i.e. a dynamic panel data model) and this research will reveal important issues regarding the estimation of the speed of leverage adjustment.
5. “Financing Patterns of Small Firms: How Important is Private Equity?”
Second, it has been observed that small firms issue substantial amounts of equity at the time of an investment and at other times quite frequently. However, it has not been systematically studied whether they issue shares because it is optimal to issue shares or because debt finance is not available to them at the time of an investment spike. In relation to this issue, it is worth investigating whether privately placed equity rather than seasoned equity is largely used at the time of an investment spike. A large use of private equity at the time of an investment spike would mean a change of ownership through the interventions of activists. Although this project is also at an early stage, this line of investigation will uncover answers to issues that have not been understood by previous research in empirical corporate finance.