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" Two Essays on the Effects of Organization Capital on Firm Behavior "
Root, Andrew
Yung, Kenneth
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Latin Dissertation
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English
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| Record Number
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1106142
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TLpq2376792321
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| Main Entry
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Root, Andrew
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Yung, Kenneth
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| Title & Author
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Two Essays on the Effects of Organization Capital on Firm Behavior\ Root, AndrewYung, Kenneth
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| College
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Old Dominion University
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| Date
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2020
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2020
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| Degree
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Ph.D.
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| Page No
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184
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| Abstract
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Kraft Heinz was formed by the investment activity of 3G Capital and Berkshire Hathaway. Following four years of ownership, usd1.7bln of cost cutting and a large usd15.4 billion write-down, Warren Buffet admitted several mistakes with the investment 1,2,3,4. Finance literature theory and empirical results assert that organization capital (“OC”) is important to firm decisions, performance and value. Economic theory indicates that fixed costs are a prerequisite for firms to show increasing returns to scale. We extend the literature on organization capital by considering its effects on firm decisions and firm value in the face of two distinct exogenous challenges; policy uncertainty and product market stress. Essay 1–Effects of Organization Capital under Policy Uncertainty: A growing stream of finance literature involves measuring the effects of organization capital (“OC”) on investment decisions, financial policy, and firm value. Li, Qui & Shen (2018) use the exogenous event of a merger or acquisition to determine whether high OC acquirers perform better. We extend the OC literature by considering economic policy uncertainty (“PU”)(Baker, Bloom & Davis, 2016), which is also exogenous to the firm, to determine the effect of OC on firms in the face of PU. Univariate tests show that high OC firms take more investment risk, have lower leverage, higher cash, lower total shareholder payouts, and higher future growth prospects. Multivariate panel regressions show that when controlling for PU, OC is significantly associated with investment activity. Higher OC firms also exhibit higher leverage, higher cash holdings and lower shareholder payouts (dividends + buybacks). OC is positively associated with firm value (Fama & French, 1998), and the coefficient of OC in the firm value regression is 15 times higher for periods of high PU versus low PU. Essay 2–Organization Capital and Product Market Strain resolve conflicting views of Financial Slack: We assemble several streams of Finance literature in order to resolve conflicting theoretical predictions (Bolton & Scharfstein, 1990) and empirical results regarding long standing differences in the agency view of financial slack, and the product market view. Four prior theoretical and empirical streams of research motivate our study: 1) Agency theory holds that the separation of ownership and control incents firms to maintain excess cash, reducing firm returns (Jensen & Meckling, 1976). 2) Differentially, a product market view notes the benefits of excess slack. Excess cash may enable firms to maintain investment plans and optimal financial policies during periods of elevated competitive stress (Fresard, 2010) and to deter or prevent new competitive entry altogether (Benoit 1984)(Bolton & Scharfstein, 1990). 3) Economic theory fairly well establishes that fixed costs internal to a firm result in positive economies of scale (Krugman, 1979). 4) Recent finance studies employing several measures of organization capital (“OC”) show an association with higher risk taking and firm value (Li, Qui & Shen, 2018). Our empirical objective becomes answering the research question ‘Do high OC firms facing product market strains hold more cash and does it enhance firm value?’ Univariate tests show high OC firms operate in industries more likely to have product market strains, have higher exogenous cash (“EC”), take more risk, have lower leverage, lower total shareholder payouts and higher future growth prospects. Multivariate regressions show that OC is positively associated with EC. However, when controlling for a product market strain and the interaction of the influences, OC association with EC becomes negative, and the overall positive association is due to the interaction of the product market strain and OC. This implies high OC firms maintain modestly higher EC overall to aid product market performance. Firm value regressions point in the same direction as the interaction term of OC and product market strain has a significant and positive association with firm value. The essays add to the literature in three ways: 1) Expands the growing Finance stream studying organization capital, more properly using the Firm Efficiency measure of Demerjian et al (2010) for robustness tests. 2) Empirically demonstrates prior streams may not conflict, rather that OC has been a missing construct to understanding firm investment behavior and financial policy choices. 3) Increases the insight into the strategic value of cash holdings.
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Business administration
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Finance
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Management
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