Corporations -- Finance

I investigate if all-equity firms are a heterogeneous group as it relates to agency costs and accounting quality. All-equity firms are a unique group of firms that choose a “corner solution” as their capital structure. Extant research, supported by well-established theories such as trade-off theory, free cash flow theory, and Jensen’s (1986) control hypothesis, generally conclude that agency conflicts motivate such structure. Research also supports the alternative argument that poor accounting quality makes debt so prohibitive that such firms are driven to this capital structure. I propose that an all-equity structure is not necessarily symptomatic of agency conflicts and poor accounting quality overall. I investigate if different motivations, within an all-equity setting, reflected by free cash flows and growth opportunities, result in different levels of agency cost and accounting quality. By anchoring on theories that link implicit costs of debt to free cash flow levels and growth opportunities, I hypothesize that free cash flows and growth opportunities are strongly linked to the justification or lack thereof for the pursuit of such strategy. I hypothesize and show that firms in the extremes of the free cash flow to growth rate spectrum exhibit significantly different levels of agency cost and accounting quality within the all-equity setting. These results support my main prediction that there exists agency costs and accounting quality differences within the all-equity setting which are associated with free cash flow levels and growth opportunities and that the pessimistic conclusions for pursuing an all-equity strategy reached by prior research should not be generalized to all such firms.

I investigate the effect of shareholder rights and information asymmetry on
option-related repurchase activity. Prior research shows that the dilution effect of the
exercise of the employee stock options on earnings per share (EPS) decreases the value of
stock options. Thus, managers tend to use stock repurchases rather than dividends to
return cash to shareholders (the dividend substitution effect). I document that the
executive stock option incentives to repurchase stock as a substitute for dividends are
stronger when firms have weak shareholder rights and the level of information
asymmetry positively influences managerial stock option incentives to repurchase stock.
Furthermore, prior research indicates that information asymmetry is positively associated
with stock repurchases. I also provide evidence indicating that the relationship between
information asymmetry and stock repurchases is stronger when firms have weaker shareholder rights.