Three Essays in Finance

Abstract

This dissertation consists of three essays in finance. In Chapter 1, I examine the effect of creditor rights on firms’ propensity to separately report R&D expenses, either in their income statements or as a footnote. Following an exogenous increase in creditor rights, firms become less likely to separately report R&D expenses, with the effect being stronger for firms where such disclosure would impose higher proprietary costs. Further analyses leveraging accounting and stock market data suggest that the undisclosed R&D expenses are reclassified as other SG&A expenses (SG&A excluding advertising). My findings suggest that stronger creditor rights, by reducing creditors’ losses in the event of default, reduce the need to signal high quality, with one such means being the separate reporting of R&D expenses. This reduced need for separate reporting enables firms to consolidate R&D with other SG&A, thus avoiding the proprietary costs of R&D expenses disclosure. However, such consolidation may distort the measurement of innovation activities and organizational capital. In Chapter 2, I examine whether the control–cash flow rights wedge captures private benefits of control (PBC) by exploiting a Mandatory Bid Rule (MBR) reform in Chile. While MBRs generally require acquirers seeking control to offer the same price per share to all shareholders, this reform allowed firms to opt out for the first three years, enabling controllers with high private benefits to continue demanding a high control premium when transferring control. I find an inverted-U relationship between the wedge and firms’ likelihood of opting out, suggesting that while the wedge proxies for PBC at moderate levels, high wedges attract greater outsider monitoring, reducing insiders’ ability to extract private benefits. My findings challenge the view of the wedge as a linear proxy for PBC and highlight the role of outsider responses in shaping private benefit extraction. Non-compete agreements (NCAs) are common in finance, yet their impact on finance workers remains unexplored. In Chapter 3, I address this gap by analyzing how increases in NCA enforceability affect the wages of loan officers, financial analysts, and personal financial advisors. I find that the mean wages of loan officers and financial advisors at the metropolitan area level increase by 4.2% and 13.6%, respectively, in the first year after an increase in NCA enforceability, with no significant effects in subsequent years. The wage increases in the first year suggest that surplus-enhancing investments facilitated by NCAs offset the reduced wage bargaining power. No effect is observed for financial analysts. Overall, my results suggest that NCAs can encourage wage growth in certain areas of the financial sector, consistent with NCAs contributing to the development of these areas.