Three Essays on Corporate Finance

Abstract

This dissertation consists of three chapters on corporate finance. The first two chapters discuss the bankruptcy liquidation market: a common question for the liquidation market is the liquidation discount: the departure of the sale price from the fair market price. In the first chapter, I discuss how fair market price is formed. In the second chapter, I compare the sale price and firm reorganization price indicated by the fair market price and ask if the current liquidation system is inefficient by excessively liquidating firms whose sale price is lower than its reorganization price. In the third chapter, I discuss the valuation of an important production asset: data.

Understanding the information structure in bankruptcy liquidations is important for designing the optimal bankruptcy and financing market. In the first chapter, I construct a novel comprehensive bid-level bankruptcy liquidation auction data and structurally estimate the buyers' information structure using a state-of-the-art auction model. I show that there is a heterogeneity in the relevant importance of different information sources across different asset types, with tangible assets depending on the appraisal price, intangible assets depending on private synergies, and financial assets depending on bidder common knowledge not captured by appraisers. I text-analyze the appraisal reports using a natural language processing model and show how heterogeneous information production and bankruptcy liquidation frictions (quality management, relocation cost, and misallocation) contribute to the heterogeneity of information structure. A counterfactual simulation shows that the cost of misallocation is high (16.89%) for intangible assets compared to tangible assets (5.6%). Overall, my results suggest that tangible assets should be liquidated promptly to avoid maintenance failure, while intangible assets require a longer liquidation period to avoid misallocation costs, and financial assets should be financed by investors with expertise.

The first chapter discusses the information structure in the liquidation market from the bidders' perspective, while the second chapter discusses the efficiency of the bankruptcy system from the bankruptcy firms' perspective: How much value has been lost in the Chinese bankruptcy system due to excessive liquidation of companies whose going concern value is greater than the liquidation value? I estimate the valuation of the asset for both the final buyer and creditor through the revealed preference method using an auction model. On average, excessive liquidation results in a 13.5% welfare loss. However, solely considering the liquidation process, an 8% welfare gain is derived from selling the asset without transferring it to the creditors. Firms that are (1) larger in total asset size, (2) have less information disclosure, (3) have less access to the financial market, and (4) possess a higher fraction of intangible assets are more vulnerable to such welfare loss. Overall, this paper suggests policies promoting bankruptcy reorganization by introducing distressed investors who target larger bankruptcy firms suffering more from information asymmetry will significantly enhance welfare in the Chinese bankruptcy market.

In my third chapter, “Data is an asset - estimating the value of corporate data," I propose a new measurement for the firms’ data and its valuation. For measurement, I construct a novel dataset combining corporate 10-Q documents and website traffic to measure the size of corporate data. For valuation, I use the exogenous shock of a competitor’s data breach event as an instrument and find that a 1% exogenous increase in corporate data leads to a 1% increase in firm valuation.