Empirical studies on corporate financial risk

Raising debt is an important part of corporate operations. Bank loans are a prevalent way for most firms to raise finance. Lenders widely use loan covenants to monitor and mitigate borrowers' credit risk. Loan covenant violations can shift the control rights from borrowers to lenders, increasing the borrowers’ lending costs. Thus, finding the factors that can reduce covenant violations have important implications for firms. In addition, corporate culture is another crucial part of corporate operations. One of the most important corporate culture values, teamwork, is necessary for all firms. It is directly related to corporate performance and firm risk. In this dissertation, I discuss four studies I ran to examine the factors that can reduce loan covenant violations and the impact of teamwork on firm performance and risk. Chapter 1 is the Introduction. In Chapter 2, I examine the association between relationship lending and the likelihood of bank loan covenant violations. I find that relationship lending reduces the probability of covenant violations. The length of the lending relationships has an inverted U-shaped effect on the likelihood of covenant violations. The borrowers and lenders both benefit from relationship lending, but long-term lending relationships weaken the borrowers’ bargaining power. In Chapter 3, I study the covenant violation effect on the cost of bank loans and examine the moderating role of the U.S. bank branching deregulation in this effect. The results indicate that loan covenant violations are detrimental to the borrowers' credit quality, and increase the costs of bank loans. By contrast, the bank branching deregulation led to an increase in bank competition, reducing the cost of bank loans in the market. However, the firms with higher credit risk benefit from the increase in bank competition and have to pay higher loan prices. As the bank branching deregulation intensifies, lenders are more likely to increase the cost of bank loans for borrowing firms with higher information asymmetry following covenant violations. In Chapter 4, I analyze the effects of mandatory derivative disclosure changes in financial statement footnotes on bank loan covenant violations. I find that the improvements in derivative disclosures reduce the likelihood of loan covenant violations. Increases in derivative disclosure content and tabular presentation significantly improve lenders’ understanding and lower borrowers' default risk. I also find that the association between derivative disclosure improvement and loan covenant violations is significant for firms with relatively severe agency and information asymmetry problems. In Chapter 5, using a sample of publicly listed U.S. firms from non-financial and non-utility industries over the 2001-2018 period, I examine the association between teamwork culture and firm risk. I find that a strong teamwork culture is positively associated with firm risk, and this relationship is more prominent during non-financial crisis periods. Moreover, a firm with a stronger teamwork culture performs better at CRS actions than its peers. A firm with a strong teamwork culture is also more likely to engage in over-investment. However, the positive association between teamwork culture and firm risk is mitigated when there are more financial constraints and higher analyst coverage. Chapter 6 is the conclusion. I conclude with remarks on the four studies in this chapter.