Essays in Corporate Finance

Abstract

This doctoral Dissertation examines the impact of firms\u27 geographic location and labor market friction, both based on the states in which firms are headquartered, on corporate policies. The first essay examines the impact of the geographical location of the firm on the use of operating leases. The main idea of this essay is that, because obtaining information and monitoring is costly for potential lessors, especially when a lessee is relatively far away from financial centers, rural firms are less likely to use operating leases in comparison to their urban counterparts. Consistent with this hypothesis, I show that rural firms tend to have lower lease intensities than similar urban and small city firms. In addition, I find that firms with higher levels of debt capacity lease less, with higher financial constraints lease more, and with higher analyst following lease more. These findings are consistent with the existence of an agency problem associated with leasing. The second essay examines whether firms exhibit less tax aggressiveness in order to mitigate workers\u27 exposure to unemployment risk. I use unemployment insurance (UI) benefit laws as a proxy for unemployment risk and multiple measures of tax aggressiveness. Given that tax aggressiveness is risky and costly for the firm and its employees, I argue that high state UI benefits lower labor unemployment risk and, hence provide firms an opportunity to exhibit more tax aggressiveness. Consistent with this hypothesis, I find a negative relation between firms\u27 tax aggressiveness and unemployment risk. In additional analysis, I also find that the negative relation is more pronounced for firms in industries that are more labor intensive and industries in which labor has more bargaining power. Overall, these findings suggest that labor market frictions have implications for corporate tax policy