Market frictions: Financing decision and firm value effects

This dissertation examines the impact of market frictions on the financing decision of a firm. Corporate finance literature overwhelmingly assumes that market frictions do not exist. However, market frictions such as regulation and taxes are becoming an increasingly important aspect of managerial decision-making. This dissertation explores the issue of whether and how market frictions affect a part of managerial decision-making namely the financing decision. The study further looks at the mechanisms that play into why management chooses a particular financing decision by exploring firm risk and firm value. The first dissertation paper investigates the financing decision impact of large firms that are involved in tax aggressive behavior. The study shows that tax aggressive firms take on less debt and the effect on firm value is proposed as a possible explanation. This research will be useful to regulators and academic researchers interested in the field of tax avoidance and capital structure. The second dissertation paper investigates the effect of audit quality on risk, cost of debt and the financing decision of emerging growth companies (EGC) as defined by the Jump-Start Our Business Startups Act (JOBS Act). The results show that JOBS Act decreased the idiosyncratic risk of EGCs as compared to similar firms prior to the passing of JOBS Act. This research contributes to existing knowledge about SOX404 (b) attestations, emerging growth companies (EGC) and financing decision of small IPO firm while evaluating auditing regulation and assisting the audit committee in making optimal decision regarding investments in stronger internal control. The third dissertation paper examines the impact of information asymmetry on the financing decision of a firm. Contrary to theory, the results show that firms with lower disclosures (or greater information asymmetry) have less debt. This research has policy implications and contributes to academic research on financing decisions and information asymmetry. Overall, the dissertation has major policy implications in addition to facilitating managerial, investor, and creditor decision-making.