| My dissertation is a study of corporate investment behavior under market imperfections. This dissertation is structured as three inter-related essays that each addresses a particular aspect of the investment behavior of firms and all share common themes which are (1) market imperfections complicate managerial decisions on investments; and (2) the models based on perfect market assumptions may not be correct. The first essay, The Relationship between Internal Cash Flow and Investments, studies the puzzle of the sensitivity of corporate investments to internal cash flows and finds that a U-shaped sensitivity curve between investment and cash flows can be clearly identified in the US and in most other countries studied. The second essay, The Relationship between Market Valuation and Corporate Investments, studies the relationship between stock market valuation and firm investments using a model controlling for many market imperfection components and employing simultaneous equations estimates. Essay two finds that both market perceptions and fundamental factors are important influences on corporate investment decisions. Moreover, we document that market valuation has a much higher impact on investment than fundamental variables, which seems to be consistent with the contentions in Barro (1990) and Baker et al. (2003). The third essay, Who Will Benefit from Diversification: A Transaction Cost View of Diversified Firms, studies the issue of diversification and using data for a number of countries finds that both firm-level and country-level variables are important determinants of the excess values of diversified firms, we find that country risk, legal system, country disclosure level, information asymmetry measures, and agency cost measures are all important factors that influence diversified firm values. Our findings are largely consistent with those suggested by the transaction cost theory and provide a new perspective for the evaluations of firm diversification. In summary, this dissertation studies the impacts of market imperfections on corporate investment decisions and suggests that when operating in an imperfect market, a firm's investment decision-making process is influenced by cash flows, stock prices, and transactions costs, and is much more complicated than in perfect markets. |
