Three essays in corporate finance
This dissertation consists of three essays in corporate finance. There are five chapters. In the first essay, we find that local gambling preferences have economically meaningful effects on corporate innovation. Using a county's Catholics-to-Protestants ratio as a proxy for local gambling preferences, we show that firms headquartered in areas with greater tolerance for gambling tend to be more innovative, i.e. they spend more on R&D, and obtain more and better quality patents. These results are supported by several robustness checks, tests to mitigate identification concerns, and analyses of several secondary implications. Investment in innovation makes a stock more lottery-like, a feature desired by individuals with a taste for gambling. Gambling preferences of both local investors and managers appear to influence firms' innovative endeavors and facilitate transforming their industry growth opportunities into firm value. In the second essay, we find robust evidence that banks headquartered in more religious areas take less risk and remain less vulnerable to financial crises. To reduce risk, these banks grow their assets more slowly, hold safer assets, rely less on non-traditional banking, and provide less incentives to their executives to increase risks. Local religiosity has a more pronounced influence on risks among banks for which local investors and managers are more important. But these banks command lower market valuations during normal times. Overall, this paper provides the first empirical evidence of the importance of human behavior in bank risk-taking. In the third essay, I examine the influence of sell-side financial analysts on corporate social responsibility (CSR), and find that firms with greater analyst coverage tend to be less socially responsible. To establish causality, I employ a difference-in-differences (DiD) technique, using brokerage closures and mergers as exogenous shocks to analyst coverage, as well as an instrumental variables approach. Both identification strategies suggest that analyst coverage has a negative causal effect on CSR. My findings are consistent with the view that spending on CSR is a manifestation of agency problem, and that financial analysts exert pressure on managers to cut back such discretionary spending.