Essays in Corporate Finance

The thesis consists of two essays in corporate finance. In the first Chapter, I study China’s trade liberalization and its impact on manufacturing firms' capital structure and debt structure. Moreover, I examine how the trade shock affects banks’ sectoral loan allocation. In my second chapter, I study how firms' cash policies and debt structure are connected, by both documenting some new stylized facts and building a theoretical model of firm liquidity management. In the first chapter, I study how China's trade liberalization affects banks' sectoral loan allocation through manufacturing firms’ demand for debt in the U.S. Using a difference-in-differences approach, I find that firms with a higher import penetration from China have a larger decrease in their short-term debt usage after China's entry into the WTO in 2001. The effect is more pronounced for firms with bond ratings and financially unconstrained firms, suggestive of lower demand for credit. Exposed firms take fewer new short-term loans from banks, have lower spreads of credit lines, and hoard more cash. Next, I investigate how the decrease in loan demand affects banks' sectoral lending decisions. After 2001, banks with a larger fraction of C&I loans to exposed manufacturing firms decrease commercial lending and increase mortgage lending, especially for residential purposes. The economic mechanism is banks' financial constraints: The reallocation to mortgage lending is concentrated in banks that are small and have a low capital ratio. My results show that China’s trade liberalization crowds in household debt during 2001-2005. In the second chapter of my PhD thesis, I empirically examine how corporate cash holdings relate to debt structure, that is, the fraction of bond financing. I find that the relation between cash holdings and bond financing is U-shaped in the cross-section of firms. That is, firms that do not use bond financing or those that are entirely bond financed exhibit the highest cash holdings. The differential in cash holdings due to heterogeneity in bond nancing is substantial and amounts up to 20% of assets. Moreover, the intensity of bond financing is also non-linearly related to market-to-book assets, firm size and leverage. I present a model of financial constraints to rationalize these patterns.