Essays in Empirical Corporate Finance

This thesis examines three studies related to the effect of information asymmetry on capital structure and cash holdings of firms. Firstly, we examine the funding patterns of large and regular investments by large and small public UK firms. Our main finding is that both size of firm and investment are important in explaining differences in funding patterns of firms though size of the firm dominates. Funding deficit covered by external capital consists predominantly of equity funding for small firms and predominantly of debt funding for large firms. The main reason firm size matters is that smaller firms tend to grow faster than large firms and have fewer tangible assets on their balance sheets. Both factors make debt financing unattractive. Secondly, we examine financially constrained private UK firms facing large investments. We find that the leverage of constrained firms is generally nonresponsive to changes in traditional determinants of leverage. This contrasts with unconstrained firms who show the expected negative relationship between profitability and leverage. When faced with financing deficits, constrained firms are nonresponsive to new debt or new equity while unconstrained firms make changes to new debt. We attribute this to a relatively higher level of information asymmetry of constrained private firms limiting their ability to address financing deficits by changing their debt and equity holdings. The third paper examines excess cash holdings among European firms. The results indicate that determinants of excess cash depend on the level of turnover growth a firm falls in any given year. The middle group however dominates whenever there is a difference between groupings. When different combinations of high debt and high excess cash are considered, it appears that the unusual combination of a simultaneous high-level debt and excess cash results from greater investment in Research and Development and CAPEX unlike High Debt-Low-Excess cash firms.