Essays in corporate finance: Strategic responses to environment and incentives

Firms mitigate the negative impact of both contemporaneous and future operating conditions by: (i) reducing long term leverage; (ii) reducing short term leverage (including leases); m stockpiling cash; (iv) reducing capital expenditures; and, (v) increasing the availability of short term debt. This study empirically considers these five alternatives within a simultaneous equation setting. Firms do appear to anticipate future levels and volatility of cash flows quite differently. In anticipation of future profit volatility, firms increase cash holdings and credit line usage; they do not adjust long term debt or operating leases. Conversely, in anticipation of future decreases in profit levels, firms lower long term debt and operating leases; they do not increase cash holdings and credit line usage. Share sales also increase with operating risk and, in this framework, are the dominant mechanism for financing risk-motivated precautionary cash holdings. I also present an agency-cost model of capital structure with specific implications for firm leasing policy. Using a broad sample of firms from 1996 to 2005, I find that an increasing proportion of salary paid in bonus and an increasing reliance on accounting performance decreases the amount of off balance sheet financing, specifically operating leases, utilized in companies' capital structures when lease length varies. When lease length is held constant both are positively related with leasing levels, also consistent with theory. I find that increasing abnormal leasing levels significantly reduce the market value of the firm. I also study the effect of cash levels, corporate charter provisions, and bank debt on two separate types of takeovers. Using a broad sample of US firms I find evidence for the agency motivation of takeovers when post merger leverage changes are small, and evidence for the efficiency motive when post merger leverage changes are high. I also find takeover behavior consistent with leveraged buyouts within the cash rich subsample of firms.