Date of Award
Doctor of Philosophy (PhD)
Erik P. Gilje
Michael R. Roberts
This dissertation goal is to deepen our understand about firms' resource allocation decisions. In the first chapter, using an NPV-based revealed-preference strategy, I find that idiosyncratic risk affects the discount rate that firms use in their capital budgeting decisions. I exploit quasi-exogenous within-region variation in project-specific idiosyncratic risk and find that, on average, firms inflate their discount rate by 5 percentage points (pp) in response to an 18pp increase in idiosyncratic risk. Moreover, these discount rate adjustments are negatively associated with measures of firm profitability. I then explore how proxies for costly external financing and agency frictions relate to discount rate adjustments. Consistent with theoretical predictions, firms appear to adjust their discount rate to account for both frictions.
In the second chapter, which is joint work with Erik Gilje and Jérôme Taillard, We study when and why firms exercise real options. Using detailed project-level investment data, we find that the likelihood that a firm exercises a real option is strongly related to peer exercise behavior. Peer exercise decisions are as important in explaining exercise behavior as variables commonly associated with standard real option theories, such as volatility. We identify peer effects using localized exogenous variation in peer project exercise decisions and find evidence consistent with information externalities being important for exercise
In the third chapter, I empirically measure the effect of ownership concentration on firms' risk-taking behavior. In support of the existing theory, I find that firms choose riskier projects when their ownership concentration increases. To obtain a causal interpretation of the results, I use the merger of financial holdings as an exogenous shock to firms' level of ownership concentration.
Decaire, Paul, "Essays In Corporate Finance" (2020). Publicly Accessible Penn Dissertations. 3744.