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External Financing Costs for Private and Public Firms

Margarita Tsoutsoura, 2010
Faculty Advisor: Daniel Wolfenzon
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This dissertation examines the financing frictions that private and public firms face. There is little disagreement that market imperfections exist and there is extensive theoretical literature arguing that external financing is costly. This dissertation contributes to the empirical literature that examines the magnitude of financing frictions. The first and second chapters study the financial constraints of private firms by exploiting a tax reform in Greece that altered the tax for family successions. Using a unique dataset of privately held firms that combines firm data with entrepreneur's family characteristics and income, I find that successions taxes greatly affect firms' succession and investment decisions and the effect is driven by financial constraints. The first chapter investigates the succession decisions of privately held firms and how this is affected by the firms' access to internal financing resources. Using the succession tax reform that altered the firms' access to internal financial resources, I find that high succession taxes are associated with lower propensity for intra-family succession, especially for family firms owned by entrepreneurs with relatively low income from other sources.

The second chapter analyzes the effect the effect of succession taxes and financial constraints on investment. I use two methodologies: 1) A difference-in-difference-in- (DDD) methodology, and 2) an instrumental variables (IV) approach, which exploits the gender of the first-born child of the departing entrepreneur as an instrument for family successions. Both the DDD and the IV estimates show that in the presence of high succession taxes firms undergoing an intra-family transfer of ownership experience a more than 40% drop in investment around succession. High succession taxes are also associated with slow total asset growth and a depletion of cash reserves (presumably used to pay taxes) for firms experiencing family successions. To identify the mechanism through which taxes affect investment, I collect data on the income of the entrepreneurs from sources other than the firm undergoing succession. I find that the investment effects are much stronger for family firms owned by entrepreneurs with relatively low income from other sources. This suggests that the observed effect of the succession tax on investment is driven by financial constraints.

The third chapter, which is co-authored work with Charles Calomiris, gauges the magnitude of financing frictions by estimating the underwriting fees of secondary equity offerings (SEOs). We analyze the cross-sectional and time series determinants of underwriting costs. Using data on SEOs for the period 1980-2008 we find that underwriting costs reflect a combination of firm-level attributes, the structure of the underwriting arrangement, and the year of the underwriting. The technology of SEOs has improved over time and that the cost reduction has been concentrated among small firms, who have been able to access equity markets much more economically over time.

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