Essays in corporate finance

This dissertation consists of three essays about firm financing. The first essay detects the bank-firm relationship in a transition country while the second and third essays address the importance of country factors in a company’s capital structure decisions. There is an extensive literature on financial crises and their effects on the economy. However, quantitative analyses at the firm level are rare. Therefore, an important issue to study is the effect of financial sector difficulties on the firm’s “real” decisions: investment, profitability, etc. The issue is particularly under-explored in the context of transition economies, where the financial systems are fragile and the occurrence of financial crises is common.;My first essay fills that gap in the literature: I study the effect of an Estonian bank’s failure in 1998 on its corporate loan clients by comparing the performance of clients to that of a random sample of other firms. First, I analyze whether bank bankruptcy causes the bankruptcy of client firms. I find that client firms are less likely to survive until 2000 even after controlling for their pre-bank bankruptcy performance. Hence, the bank-firm relationship has a significant value in a transition country. Second, I analyze the behavior of firms’ profitability, liquidity, and growth of fixed assets by differences in differences analyses. I find liquidity to be the only variable that decreases for client firms compared to control firms after bank bankruptcy. This suggests that liquidity is the channel through which the bank failure transfers to the failure of the clients.;The optimal capital structure of a firm has found lot of attention in the corporate finance literature. Many different factors are proposed as potential determinants of firm leverage. It appears that firm capital structure emerges from three sources: firm-specific, country-institutional and macroeconomic factors. In my second essay I evaluate the importance of each source in explaining the firm leverage variation simultaneously. I use a large European dataset covering almost 600,000 firms from 10 Western European countries over 1995-2002. The data are well balanced across firm sizes and industries. The unique feature of this dataset is that it allows me to study the capital structure of small firms, which has not been studied to date due to lack of data. I show that the country institutions and macroeconomic factors are significant determinants of firm leverage and that their significance varies across firm types. These factors are primary determinants of small and unlisted company leverage. This finding supports the belief that small firms are financially constrained and are less independent in determining their own leverage. Therefore, the conclusions of previous studies based on large stock market-listed firms are not portable to the average firm and additional research in the field is needed.;The third essay is interested in capital structure determinants in the transition countries. Market-based financial institutions emerged just recently in these economies, indicating that imperfections in financial markets, which explain the leverage level of firms, might be especially large. This study is based on a large sample of listed and unlisted companies from nine Eastern European countries. I find that country-specific factors explain the largest share of leverage variation for small unlisted firms while firm-specific factors explain the most for listed and large unlisted companies. This finding is well in line with the results based on Western European firms. Hence, it seems that the development level of the local financial market does not make country-specific factors more prominent.