Essays in Corporate Finance
The dissertation aims to investigate the role of asymmetric information in capital structure, investment, compensation of mortgage servicers, and bond and equity returns. Specifically, I evaluate the impact of credit ratings on debt issuance and investment of private and public firms, as well as the effect of asymmetric information on compensation of loan servicers in the mortgage backed securities market. Further, I study the relationship between ratings issued by investor and issuer-paid credit rating agencies and equity analyst recommendations. Finally, I evaluate the effect of the aforementioned signals on bond and equity returns as well as firm leverage and investment decisions. Chapter one in the dissertation is the first study to empirically evaluate the effect of credit ratings on capital structure and investment for private U.S. firms, relative to equivalent public firms. I find that private firms constrain debt issuance and investment by 4.5 and 6.5 percentage points more than public firms, respectively, when their credit ratings are on upgrade or downgrade thresholds. Consistent with these results, private firms that become public through an IPO constrain debt issuance by 10 percentage points before going public, if their ratings are on an upgrade or downgrade boundary. The second chapter studies the impact of asymmetric information between mortgage sellers and servicers on mortgage servicer compensation. We proxy for asymmetric information using the decision to retain mortgage servicing rights, which creates a principal-agent problem between sellers and servicers. Using loan-level data on Fannie Mae-insured, full documentation mortgages, we first find that loans in which sellers retain servicing rights default and foreclose at a significantly lower rate, and lose less in foreclosure than those in which they are not retained. Since it is more costly to service non-performing loans, these ex-post differences in default rates should be reflected in servicer compensation. However, using Fannie Mae MBS pool-level data, we find no difference in servicing fees for pools in which servicing rights are retained relative to pools in which they are not retained. In order to identify the impact of seller/servicer affiliation on servicing fees, we exploit a post-crisis regulatory change which altered the incentive to retain servicing rights for small sellers of MBS relative to large sellers. Finally, in the third chapter, we evaluate the information flows to the stock and bond markets of issuer versus investor-paid rating agencies and equity analysts. Equity analysts' forecasts and ratings assigned by issuer-paid credit rating agencies such as Standard and Poor's (S&P) and by investor-paid rating agencies such as Egan and Jones (EJR) all involve information production about the same underlying set of firms, even though equity analysts focus on cash flows to equity and bond ratings focus on cash flows to bonds. Further, the two types of credit rating agencies differ in their incentives to produce and report accurate information signals. Given this setting, we empirically analyze the timeliness and accuracy of the information signals provided by each of the above three types of financial intermediary to their investor clienteles and the information flows between these intermediaries. We find that the information signals produced by EJR are the most timely (on average), and seem to anticipate the information signals produced by equity analysts as well as by S&P. We find that changes in leverage are associated with lower EJR ratings but higher equity analyst recommendations; further, credit rating changes by EJR have the largest impact on firms' investment levels. We also document an "investor attention" effect (in the sense of Merton, 1987) among stock and bond market investors in the sense that changes in equity analyst recommendations have a higher impact than either EJR or S&P ratings changes on the excess returns on firm equity, while EJR rating changes have a higher impact on bond yield spreads than either S&P ratings changes or changes in equity analyst recommendations. Finally, we analyze differences in bond ratings assigned to a given firm by EJR and S&P, and find that these differences are positively related to the standard proxies for disagreement among stock market investors.