Evan Dudley

Capital-Structure Changes Around IPOs

This paper examines capital-structure changes around IPOs. We find that the magnitude of leverage changes as well as market timing in hot-issue markets are sensitive to sample selection and whether preferred shares are treated as debt when computing pre-IPO leverage. Consistent with investor concern with overinvestment, firms that rely on preferred stock prior to their IPO are more likely to engage in staged equity financing after they go public. Overall, using a broader sample of IPO firms, we find little evidence of transitory declines in leverage during hot-issue markets.

Cash Flow Volatility and Capital Structure Choice

Prior research finds a weak relation between cash-flow volatility and leverage. Using a novel measure of cash-flow volatility, we find that volatility matters more for firms that are financially constrained. Constrained firms issue debt when volatility is low, but have trouble deleveraging in response to increases in volatility. Constrained firms also hoard the proceeds from debt issues undertaken during low-volatility regimes, but invest the proceeds from debt issues when volatility is high. Overall, the observed relation between cash-flow volatility and capital structure choice is driven by financially constrained firms’ desire to ensure future financial flexibility.

Corporate Hedging During the Financial Crisis

We study corporate hedging during the 2007-2008 financial crisis. We find that hedging programs are fragile. Firms whose lenders suffered losses on their mortgage portfolios were more likely to lose access to over-the-counter derivatives, and this effect was strongest among unrated and below investment grade firms. Affected firms responded by drawing down existing lines of credit, and saving more out of realized cash-flows. Terminations of hedging programs decreased firm value by 11% to 28% in unrated and below investment grade firms. These value effects were largest among firms that did not have alternative sources of liquidity to draw upon.

The Real Effects of Proxy Advisors on the Firm

This paper examines the influence of proxy advisors (PA) on firm voting outcomes, policies and value. We measure PA influence with shareholders’ historical propensity to follow PA recommendations. PA influence increases the impact of PA recommendations on proxy voting outcomes and firm policies. However, we find a more nuanced effect with respect to firm value. When shareholders have private incentives to engage in costly research without a proxy advisor, PA influence neither harms nor benefits shareholder value. At firms with dispersed shareholders with little incentives to vote informatively in the absence of a proxy advisor, PA influence can increase value. Our findings are consistent with theories of voting in which proxy advisors compete with private information acquisition efforts by large shareholders.

Volatility and the Priority Structure of Corporate Debt

This paper examines how exogenous shocks to volatility affect the priority structure of corporate debt. We argue that increases in volatility reduce corporate debt capacity and increase the potential for dilution of existing debt holders. We hypothesize that as the potential for dilution increases, debt holders will attempt to mitigate dilution by establishing priority through collateral grants rather than through negative pledge covenants. More important, we hypothesize that increases in volatility increase the cost of senior debt relative to secured and subordinated debt which results in priority spreading; with firms increasing their reliance on both secured and subordinated debt and reducing their reliance on senior unsecured claims. We use industry level changes in tariffs and exchange rates to instrument for exogenous changes in volatility. Overall, we find that increases in volatility are associated with reductions in the use of debt, and a shift in debt structure towards secured bank debt, subordinated and convertible debt, and away from reliance on senior unsecured debt. Consistent with an increase in creditor control rights we find that increases in volatility are associated with an increase in covenant intensity of new debt issues.

What Happens at a Refinancing Point? Changes in Debt Structure and Firm Profitability

We examine changes in debt structure when firms experience financial distress. At these points in time, firms refinance and undergo substantial changes in priority structure. Specifically, we find that firms di- versify their priority structure relative to its pre-distress composition. We show, using a simple model, that these changes are the firm’s optimal response to its joint liquidity and investment needs. Additional predictions on the yield spreads of bonds issued to meet the firm’s liquidity needs are also supported by the data.