Essays on Financial Crisis.

Abstract

My dissertation examines the effects of economic shocks on acquisition outcomes and the sources of housing market bubble. The first essay investigates how the combined effects of target firm- and industry-level distress affect acquisition outcomes through the fire-sale channel. I show that distressed targets are sold at discounts when the target industry is in distress. Consistent with the Shleifer and Vishny model, the fire-sale effects cause distressed targets to be sold to industry outsiders and acquirers to gain higher return by exploiting target's weakened bargaining power. I further demonstrate the fire-sale effects in acquisitions by showing that these findings are stronger for targets with acquirers that are in different industries or where targets have high industry asset-specificity. I then examine the contagion effects of fire-sale acquisitions on target rivals in the same industry. I find that rivals earn negative abnormal returns at the announcement due to negative information from fire-sale acquisitions. Overall, the results show that the fire-sale discount in distressed target acquisitions is an important determinant of financial distress costs of a firm and contributes to industry-specific contagion of economic shocks. In the second essay, I explore (with a coauthor) whether state-level variation in recourse mortgage laws affects housing prices and mortgage lending. In a state with non-recourse mortgage law, borrowers have limited liability on their mortgage loan. We find that non-recourse law results in larger bubbles in housing prices, and identify the causal effects by comparing housing prices in contiguous border county-pairs in the United States and examine discontinuities at state borders. We also explore whether mortgage lending behavior in non-recourse states reflects anticipation of additional risk. We find that loan-to-value ratio is lower and mortgage interest rate and loan denial rate are higher in non-recourse states, which suggest that lenders are aware of additional risk in non-recourse loans. However, we find that because the emergence of the originate-to-distribute (OTD) model in the housing markets enables lenders to effectively shift the risks to other investors, mortgage lending behavior does not fully reflect the higher risk.PhDBusiness AdministrationUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/108833/1/sjoonoh_1.pd