06/12/2023
By Mengchao Ai

The Manning School of Business, Department of Finance, invites you to attend a doctoral dissertation defense by Mengchao Ai on “Three Essays on Firm Characteristics, Operating Environments, and Firm Decisions.”

Candidate Name: Mengchao Ai
Degree: Doctoral
Defense Date: Friday, June 30, 2023
Time: 11 a.m. to 1 p.m. (EDT time)
Location: Zoom. Those interested in attending should contact the student (Mengchao_Ai@student.uml.edu) at least 24 hours prior to the defense to request access to the meeting.
Dissertation Title: Three Essays on Firm Characteristics, Operating Environments, and Firm Decisions

Questions? Please contact Hieu_Phan@uml.edu

Committee:

  • Hieu Phan, Ph.D., Associate Professor of Finance, UMass Lowell (Chair)
  • Steven Freund, Ph.D., Associate Professor of Finance, UMass Lowell
  • Chi Zhang, Ph.D., Assistant Professor of Finance, UMass Lowell
  • Chi Wan, Ph.D., Associate Professor of Finance, UMass Boston (External Committee Member)

Brief Abstract:

Firms do not operate in a vacuum. Instead, they constantly interact with their surrounding environments and stakeholders. The characteristics of their stakeholders and environments, in turn, shape firm decisions in terms of operational strategies and financial policies. My dissertation, which includes three essays, aims to study the interaction between firm characteristics, operating environments, and firms’ corporate decisions.

The first essay focuses on whether and how board networks impact firms’ innovation search strategy. Specifically, I study whether and how board networks impact firms’ innovation search strategy. Innovation search strategies can be explorative or exploitative, where the former are strategies that investigate unknown territories and are regarded as riskier, and the latter rely on existing know-hows and are considered more conservative. My results show that better connected boards engage in more exploitative innovation search strategies, and this effect is more pronounced for firms in more competitive industries, firms with busy directors, and firms with many independent directors. Tests using exogenous director retirements and deaths confirm the baseline finding. Board connectedness is also positively associated with high innovation output, impact, efficiency, as well as firm value and performance. Further tests suggest that firms with well-connected boards seem to adopt a conservative innovation approach within the firm but actively acquire targets with patents and impactful innovation output.

The second essay studies how environmental risks induced by the potential inundation associated with sea level rise affects firms’ capital structure decisions. I find that firm leverage decreases with inundation risks associated with sea level rise. To establish causality, I consider firms’ relocation of their headquarters, a propensity score matching estimator, and a difference-in-differences estimator around the release of the documentary “An Inconvenient Truth” and find that my results are robust. The negative relation between inundation risks due to sea level rise and financial leverage is more pronounced for firms with more geographically concentrated operations, firms with higher levels of product market competition, and firms with non-investment grade ratings. SLR risk-affected firms shift more towards equity and away from debt in their capital raising efforts and have relatively higher weight of their leverage in short-term debt. My findings highlight firms’ proactive adjustment and adaptation to long-term environmental risks.

The third essay examines whether and how firms adjust their capital structures in response to the passage of data breach disclosure laws. The main finding is that firms reduce their leverage ratio by 0.5% to 1.6% percentage points after the passage of these laws. The effect is stronger for larger firms, firms with diverse customer bases, and firms with hard-to-read annual reports. I find some supporting evidence that firms shift away from debt financing towards equity financing as the cost of equity capital declines significantly in the aftermath of these policy changes. Firms also increase their hiring of IT professionals after the passage of data breach disclosure laws. These results together highlight the importance of considering a wider range of factors in the new digital age in firms’ capital structure decisions.