Date of Award
Doctor of Psychology (PsyD)
A growing stream of finance literature involves measuring the effects of organization capital (“OC”) on investment decisions, financial policy, and firm value. Li, Qui & Shen (2018) use the exogenous event of a merger or acquisition to determine whether high OC acquirers perform better. We extend the OC literature by considering economic policy uncertainty (“PU”)(Baker, Bloom & Davis, 2016), which is also exogenous to the firm, to determine the effect of OC on firms in the face of PU. Univariate tests show that high OC firms take more investment risk, have lower leverage, higher cash, lower total shareholder payouts, and higher future growth prospects. Multivariate panel regressions show that when controlling for PU, OC is significantly associated with investment activity. Higher OC firms also exhibit higher leverage, higher cash holdings and lower shareholder payouts (dividends + buybacks). OC is positively associated with firm value (Fama & French, 1998), and the coefficient of OC in the firm value regression is 15 times higher for periods of high PU versus low PU.
We assemble several streams of Finance literature in order to resolve conflicting theoretical predictions (Bolton & Scharfstein, 1990) and empirical results regarding long standing differences in the agency view of financial slack, and the product market view. Univariate tests show high OC firms operate in industries more likely to have product market strains, have higher exogenous cash (“EC”), take more risk, have lower leverage, lower total shareholder payouts and higher future growth prospects. Multivariate regressions show that OC is positively associated with EC. However, when controlling for a product market strain and the interaction of the influences, OC association with EC becomes negative, and the overall positive association is due to the interaction of the product market strain and OC. This implies high OC firms maintain modestly higher EC overall to aid product market performance. Firm value regressions point in the same direction as the interaction term of OC and product market strain has a significant and positive association with firm value.
The essays add to the literature in three ways: 1) Expands the growing Finance stream studying organization capital, more properly using the Firm Efficiency measure of Demerjian et al (2010) for robustness tests. 2) Empirically demonstrates prior streams may not conflict, rather that OC has been a missing construct to understanding firm investment behavior and financial policy choices. 3) Increases the insight into the strategic value of cash holdings.
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"Two Essays on the Effects of Organization Capital on Firm Behavior"
(2019). Doctor of Psychology (PsyD), Dissertation, Finance, Old Dominion University, DOI: 10.25777/76k7-ev51