Essays in Financial Economics

This thesis consists of two chapters that study separate subjects in the area of corporate finance.

The first chapter, titled â Economic Gains in Bank Mergers and Acquisitions â Evidence from Targetsâ , investigates economic gains in bank mergers and acquisitions (M&A) by focusing on bank targets. Demonstrating efficiency increases resulting from bank M&A has been elusive to the banking literature. Imake use of a novel hand-collected dataset, which allows to observe financial statements for transacted target banks both before and after the deal effective date. Addressing endogeneity concerns by constructing the counterfactual frommergers that fail for reasons exogenous to target performance, I show evidence that acquiring banks create economic value by pursuing M&A deals. Cost reductions and higher post-deal securities productivity constitute bankM&A related value sources. The results are consistent with banks pursuingM&A to realize economies of scale.

The second chapter, which is co-authored work with RÃŒdiger Fahlenbrach and René Stulz, is titled â How Valuable Is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisisâ . We use the COVID-19 shock as a laboratory to investigate the value of financial flexibility. Firms with greater financial flexibility should be better able to fund a revenue shortfall resulting from the COVID-19 shock and benefit less from policy responses. We find that firms with high financial flexibility within an industry experience a stock price drop that is 26%, or 9.7 percentage points, lower than those with low financial flexibility. This differential return persists as stock prices rebound. Firms more exposed to the COVID-19 shock benefit more from cash holdings. No evidence suggests that recent payouts worsened the average firmâ s drop in stock price. Our results cannot be explained by a leverage effect.