Essays on capital structure and dividend policy

Essay one examines the underpricing of initial public offerings (IPOs). If demand for IPOs exceeds predictions then investment banks can fix prices, subject to some constraints. They can exploit this power to maximize profits. Profit maximizing IPO prices, expected profits and ex ante projected underpricing are modeled. Projected underpricing is a significant factor in predicting actual underpricing. The model explains the relationships between underpricing and deal size, and offers an economic model for the partial adjustment phenomenon.; Essay two examines debt's effect on the firm's decision to issue initial or seasoned equity offerings (SEOs). For IPOs, debt in the capital structure affects underpricing due to a reduction in asymmetric information and wealth transfers from shareholders to debtholders. Both of these factors reduce IPO underpricing, but have opposite effects on SEOs. Wealth transfers to bondholders lower stock price. Theory implies that a reduction in asymmetric information should cause a lower drop in price after the announcement of the offering. The analysis shows that wealth transfers from shareholders to debtholders are an important factor in both the underpricing of IPOs and the change in price of SEOs following announcement. There is some support for the view that debt signals some private information in IPOs, but not in SEOs. Implications of these results include support for a pecking order of capital structure that is dependent on previous financing decisions.; Essay three examines the interaction between capital structure and dividend initiations. Positive abnormal returns when firms initiate dividends are thought to be due to signaling asymmetric information or reducing agency costs. Theory also suggests that these are reasons for choosing debt in the capital structure. This study finds the effect of initiating dividends diminishes when there is debt. Abnormal returns are not always increasing in dividend yield, particularly for highly levered companies. Highly levered companies benefit from wealth transfers from bondholders. For these firms, paying dividends increases equity value because shareholders are given priority over bondholders for some of the firm's cash flows. The results are consistent with both the information-signaling hypothesis and the agency cost hypothesis, but show that existing capital structure does matter.