Essays in Dynamic Corporate Finance

This dissertation consists of two essays on dynamic models in corporate finance. In the first essay, I estimate a dynamic investment model for business groups in which their pyramidal ownership structure generates an agency problem between controlling and minority shareholders. In the model, the controlling shareholder can transfer resources across group firms using intra-group loans, allowing risk sharing and reducing the need for external financing. In a sample of Chilean business groups, I perform counterfactual experiments in which I compare group-affiliated firms with equivalent non-group firms. I find that for the average business group the incremental value of the internal capital market represents roughly 1.5-1.7% of the firm equity value. Although the controlling shareholder gets a larger portion of the value gains, minority shareholders also benefit from these internal transactions. In the second essay, we estimate a structural model of investment for a firm exposed to output price risk, which can be hedged using derivatives. In our model, we endogenize the cost of debt, which is affected by the firm's risk management policies. Hedging, therefore, creates value for the company by reducing the cost of debt. Additionally, since hedging has the effect of reducing the variability of the cash flows generated by the firm, it also creates value by exploiting convex costs and concave payoffs in our model. Using a dataset with detailed information on the derivative positions of upstream oil and gas firms during 1996-2013, we estimate the model via the simulated method of moments (SMM). We estimate that the value of hedging is 7.67% of assets. Roughly, half of this value is a result of the effect of hedging on the cost of debt, the rest of the value being related with other non-linearities in the model. Comparative statics exercises suggest that the variables that most affect hedging policies are the volatility of internal cash flows, capital adjustment costs, costs of equity financing, and the risk premium/discount in the derivatives market. Consequently, the value created by hedging is also most sensitive to these variables, and especially to the cost of equity financing and the risk premium/discount in the derivatives market.Finance, Department o

Overlapping Networks of Credit and Control

Business groups are networks of firms connected by ownership links. We study the reaction of these networks to the 2008-9 crisis using a unique dataset of Chilean intra-group loans. Internal credit increases swiftly during the crisis. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Like pure intermediaries, central firms keep net lending relatively constant. Central firms do not experience a significant fall in profitability relative to the average group firm, although receivers of intra-group loans perform significantly better. Our results show that control rights are essential for credit intermediation at times of distress