Essays on Corporate Finance Issues

Abstract

This dissertation consists of two essays on corporate finance issues. In the first essay (Chapter 1), I explore whether business group affiliations affect the covariance structure of stock returns in Korea. I find that the stock returns of firms belonging to the same business group show positive and significant comovement. The strong comovement between group returns and firm returns is explained by correlated fundamentals. I find strong comovement among business group affiliate earnings. Moreover, variance decomposition of returns shows that cash flow news plays a relatively more important role in explaining group comovement than discount rate news, suggesting a link between stock return comovement and the “tunneling” and “propping” behaviors of business groups. Finally, return comovement increases when a firm joins a business group. In the second essay I show that, based on the decomposition of a model's R2, latent manager qualities play a less important role than firm qualities in explaining the variation in innovation productivity. Labor economists argue that the average ability of managers who are raided should be higher than the average ability of managers who die suddenly. Our results show that the average change in innovation productivity following manager raids is not significantly different from that following manager deaths. The difference in abnormal returns surrounding manager raids between high and low innovation firms is similar to that surrounding manager sudden deaths. Assuming that exceptionally innovative managers are scarce, our results imply that managerial ability to promote innovation is not a sufficient determinant of manager quality. Overall, our evidence suggests that firm attributes matter more for stimulating corporate innovation than managerial attributes.