Abstract

Chapter 1 develops a model of firm value and leverage with endogenous default and endogenous liquidation value. This model is used to investigate the interrelationship of leverage choices among firms in an industry. If a firm's competitors are highly levered, they will be limited in the funds they can raise to acquire the firm if it defaults. This reduces the recovery of the firm's debt holders in default, and increases the cost of the firm's debt ex ante. However, if it is anticipated that a firm will make acquisitions in a downturn, this serves to buffer its debt against default and lower the firm's cost of debt ex ante. The result is an industry equilibrium with heterogeneity in the leverage of firms. It also leads to a non-monotonic relationship between the leverage of entrants and incumbents. Chapter 2 studies the choice of whether to own or lease productive assets. The operating lease contains an option to put the asset to the lessor for a cancellation payment, providing a hedge against operating losses. This study develops a real options model of the lease in which this hedge comes at the cost of higher equilibrium rental payments. The model finds that leases are chosen over ownership by firms with volatile profitability or limited financial resources, and for assets with high operating leverage and those that are less firm-specific. These hypotheses are investigated using data on the financing of commercial aircraft. The data confirms the model's predictions with respect to profit volatility, financial resources, and firm-specificity. It also reveals that leasing is used to secure credit by circumventing the automatic stay provision that hampers the repossession of owned assets under Chapter 11 bankruptcy.

Chapter 3 examines standard mutual-to-stock thrift conversions from 1989 to 2006, and finds that conversion proceeds are often not fully invested in the firm. Many converters are not capital constrained before conversion, and make high dividend payments following conversion. Dividends, and proceeds from selling the thrift to an acquirer, provide investors with a windfall profit. This has policy implications for future thrift conversions, as well as pending legislation on the conversion of credit unions.