Three Essays in Corporate Finance

The primary goal of corporate financial managers is to maximize shareholder value and my dissertation aims to get a deeper understanding about the actions that firms and their managers take to achieve the goal of maximizing shareholder value. In this spirit, my dissertation is comprised of three distinct essays in the domain of corporate finance investigating the economic determinants of firm performance, cost of corporate debt and corporate policies.;My first essay examines the performance impact of relative quality of firms' peer companies selected for determining executive compensation. I identify a firm's relative peer quality by its relative ranking among peers based on their prior profitability. I find that firms with higher relative peer quality tend to earn superior risk-adjusted stock returns and experience higher profitability growth compared to firms that have lower relative peer quality. These results cannot be fully explained by CEO's power, compensation, or intrinsic talent, neither by possible earnings management. Learning among peers and the increased incentive induced by the peer-based tournament, however, might contribute to relative peer quality's positive performance effect. Overall, this essay shows that relative quality of executive labor market peers can have a significant impact on firm performance and provides valuable insights on how peer companies can be used in designing more effective incentive contracts.;The second essay investigates the economic determinants of firms' cost of debt. By examining a large sample of corporate bank loans initiated between 1994 and 2010, I find that a firm's stock liquidity, which is a measure of the ease with which a firm's stock is traded on the market, has a significant impact on the firm's cost of debt. Specifically, I find that firms with higher stock liquidity have lower spreads for the loans they obtain. In addition, this relationship is causal, which is established in a difference-in-differences framework by utilizing the 2001 decimalization of tick size as an exogenous shock to stock liquidity. I further find that reduction in liquidity and default risks are two possible mechanisms through which stock liquidity impacts cost of debt. Finally, I find that firms with higher stock liquidity have less stringent non-price loan terms such as longer loan maturity and lesser likelihood of collateral requirements. In summary, this essay indicates that firms' stock liquidity is an important economic determinant of their cost of bank debt, which is one of the major external financial sources available to them.;My final essay investigates the impact of firms' internal environment on corporate policies by examining the relation between organization capital, an important intangible capital of firms, and innovation. Using a sample of patents granted to U.S. firms over the period 1980--2008, I find that firms' organization capital has a positive impact on innovation. Specifically, I find that firms with more organization capital generate greater number of patents and receive more citations on their patents. The results are robust to the use of alternative measures of organization capital and innovation and using a two-stage least squares method and propensity-score matching to control for endogeneity. In addition, I find that better capabilities to handle inherent difficulties associated with the innovation process and reducing career concern threats are possible mechanisms through which organization capital affects firm innovation. Overall, the results provide strong evidence about the vital role organizational characteristics such as investment in organization capital play for innovation, an important driver of firm value and economic growth.