In Chapter 1, I analyze optimal capital structure using a model in which firms issue securities in order to (1) finance investments in operations and (2) recapitalize the firm. In this trade-off model, firms balance the tax benefits of debt against the costs of financial distress. Key to the analysis, the marginal tax benefit of debt depends on whether the debt is used for financing investments or financial restructuring. The theory explores leverage dynamics with personal and corporate taxes in a trade-off model with continuous leverage adjustments and no security issuance costs. Depending on firms' external financing needs, the marginal source of financing can be debt or equity. There are two local leverage targets for firms with leverage above or below a threshold. The model generates a leverage distribution that closely matches the data, including many zero-leverage firms. Policymakers can reduce the expected bankruptcy loss without losing tax revenue by taxing shareholders more at the personal level and less at the corporate level. In Chapter 2, I estimate a new measure of marginal tax "benefits" of debt issuance that accounts for personal taxes from a dynamic perspective. Previous literature overestimates the marginal tax benefits of debt by definition since they implicitly assume that debt issuance always leads to a reduction in equity value. However, debt issuance only reduces equity value when replacing equity issuance. If the proceeds from debt issuance are expected to generate additional payouts, net personal tax costs can exceed the corporate tax savings of debt issuance, leading to a negative tax benefit even if the firm has positive taxable earnings. I find that there is no marginal benefit to borrowing for seemingly underleveraged U.S. firms. The new measure explains the observed leverage changes better than the traditional measure. In Chapter 3, we study the microstructure of the financial market for close trading and the effects on price informativeness. Passive investment strategies that trade at market close have incurred high transaction fees charged by the primary exchanges. Investment banks undercut the exchanges by executing client orders at close prices set on the exchanges yet charging lower fees. While providing liquidity, banks trade on the order flow information. Using a quasi-experimental shock -- an NYSE close auction fee cut -- we find that banks' trading activities improve the informativeness of close prices and reduce the cost of passive investment strategies. To explain this finding, we propose a model where dual trading improves price discovery. A bank contributes to price discovery by trading on the informativeness of the orders it receives relative to the market. The implications of our model apply generally to scenarios with multiple trading venues where venue operators trade on order flow data. As an application of our results, the common practice of trading on retail order flow information could potentially improve price discovery.

Creator

• Hu, Jingxiong

DOI

• https://doi.org/10.21985/n2-8h6c-h856

Subject

• Economics
• Finance

Language

• en

Alternate Identifier

• etdadmin_upload_986275
• http://dissertations.umi.com/northwestern:16585

Date created

• 2023-01-01

Resource type

• Dissertation

Rights statement

• In Copyright