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Investigating the Impact of Chinese Financing on Productivity in the African Continent

By Kedest Mathewos   

Given that productivity is a key component of long-term economic growth and that China has become an important source of external financing in Africa, this study aims to investigate the impact of Chinese foreign direct investment and government-to-government loans on productivity. Using a panel of the top fourteen African recipients of Chinese financing during the period 2003-2017, this study employs a two-stage regression process. The first relies on the use of a revised version of the Solow Model that accounts for human capital, natural resource accumulation and country-specific heterogeneity, to generate values of total factor productivity. The second examines the impact of Chinese financing on this generated measure of productivity. After taking into account significant confounding variables such as institutional quality, trade openness and manufacturing value-added, this study finds that Chinese foreign direct investment (FDI) has a significant negative impact on productivity while Chinese government loans are positively associated with productivity. However, consistent with the literature, the impact of Chinese FDI depends on the country’s absorptive capacity – proxied here by the level of human capital accumulation. Therefore, as African countries seek to boost productivity levels, they should continue to attract Chinese government loans while enhancing their FDI absorptive capacity.

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Advisors: Professor Lori Leachman, Professor Grace Kim, Professor Kent Kimbrough| JEL Codes: O4, O47, F21

Private Equity Buyouts and Strategic Acquisitions: An Analysis of Capital Investment and the Timing of Takeovers in the United States

By Anthony Melita   

This paper investigates how motivational differences between agents who execute private equity buyouts and those who execute strategic (corporate) acquisitions may influence the timing of capital investment via takeovers. This paper synthesizes prominent merger theories to inform macroeconomic variables that may drive acquisitions. I find a significant negative expected effect of volatility on capital investment via takeover for each buyer type, a negative expected effect from valuation multiples on capital investment from PE buyouts, and a positive expected effect from debt capacity (EBITDA-CAPEX) on capital investment from PE buyouts.

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Advisors: Professor Grace Kim | JEL Codes: G3, G34, G29

An Unequal Dream: The Mortgage Rate Premium Paid by Black Communities

By Michael Nicholson   

This paper analyzes loan pricing discrimination against predominantly black communities in U.S. mortgage markets. Building on previous literature, this paper posits that ceteris paribus predominantly black communities continue to face economically significant discrimination in mortgage pricing. Ultimately, this paper concludes that predominantly black communities face 10-14 basis points of pricing discrimination in mortgage loans which corresponds to 12.6-17.6% higher rate spreads. This estimation comes after accounting for geographic and lender effects, borrower quality, tract-level characteristics, and loan type. These results confirm past findings of pricing discrimination and illustrate yet another financial barrier for black households in this country.

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Advisors: Professor Emma Rasiel, Professor Kent Kimbrough | JEL Codes: R2, J15, G21

Determining the Drivers of Acquisition Premiums in Leveraged Buyouts

By Peter Noonan   

This thesis analyzes factors that determine acquisition premiums paid by private equity firms in public to private leveraged buyouts. Building off of established literature that models the acquisition premiums paid in corporate mergers and acquisitions (M&A), this paper considers factors that influence a private equity firm’s willingness to pay (referred to as reservation price) and the bargaining power dynamic between a target company and acquirer in leveraged buyouts. Specifically, multivariable regression analysis is used to quantify the impact of a target company’s trading multiple, profitability, stock price as a percentage of its annual high, and number of competitors, a private equity firm’s deal approach and payment method, and the financial market’s 10-year US Treasury yield and high-yield interest rates at the time a transaction was announced. A sample of 320 public to private leveraged buyout transactions completed from 2000 to 2020 is constructed to perform this paper’s regression analysis. Using 2008 as an inflection point, this thesis then applies the same regression model to the subperiods from 2000–2008 and from 2009–2020 to examine how these drivers have changed as a result of industry trends—increased competition, low interest rates, and new value creation investment strategies—as well as the 2008 financial crisis and US presidential election—two crucial events that caused tremendous change in the financial system and intense scrutiny of the private equity industry. From the same original transaction screen, a second sample of 659 transactions is used to perform a difference of acquisition premium means t-test to analyze how the absolute magnitude of leverage buyout acquisition premiums have changed across these two subperiods. The second sample consists of more transactions due the t-tests less data-demanding nature as a result of its fewer variables. Results of this paper’s baseline model suggest that acquisition premiums are driven by a target company’s…

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Advisors: Professor Ronald Leven, Professor Michelle Connolly | JEL Codes: G3, G11, G34

Competition and Innovation: Evidence from Third-Party Reprocessing in the Medical Device Industry

By Varun Prasad   

Healthcare is projected to soon become the industry with the largest amount of spending on research and development in the world. While competition has the potential to catalyze the development of new healthcare technologies and drive down costs, increases in competition have also been thought to hinder innovation as a result of thinner profit margins and reduced incentives. I estimate whether and to what extent competition in the medical device industry promotes innovation. Using Food and Drug Administration data on medical device applications from 1976 to 2019, I examine how original equipment manufacturers respond to the entry of third-party reprocessed devices. I find that, when controlling for year and medical specialty, the introduction of a reprocessed device leads to an almost five-fold increase in new device applications by original manufacturers after both one and two years. These results suggest that an increase in competition within the medical device market has spurred innovation and the development of new technologies.

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Advisors: Professor James Roberts, Professor David Ridley | JEL Codes: L1, D22, L65

“Behind the Scenes:” An Empirical Investigation of Broadway Show Success Factors

By Alexander Sanfilippo   

This paper analyzes the impact of financial and objective factors on Broadway show success. The analysis differs from previous literature through its exclusive focus on Broadway productions that open between June and February, so defined as the “Pre-Season,” as well as its attempts to establish causality through an instrumental variable regression. Two other methods of analysis are also used in accordance with past research: an ordinary least squares regression and relative risks hazard model. The results demonstrate the significant impact of first week attendance on long-term show success and reiterate the essential function of the Tony Awards in Broadway survival. This paper also introduces the positive impact of ticket pricing on show survival. Discussion on the implications surrounding the difficulty of obtaining show-specific budget data concludes the paper, arguing that this should be an area of future focus and collaboration between researchers and Broadway producers.

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Advisors: Professor James Roberts, Professor Brad Rogers, Professor Kent Kimbrough| JEL Codes: C4, C41, C26

Investigating Underpricing in Venture-Backed IPOs Using Statistical Techniques

By Michael Tan   

This paper concerns applying statistical methods to investigate under-pricing in VC-backed technology Initial Public Offerings (IPOs) since the great recession. In particular, firm, market, and IPO-specific variables were explored to determine if there were any significant relationships to under-pricing. The paper focused on the Bank Preference theory of under-pricing, where under-pricing is said to occur because investment banks running IPO processes are incentivized to under-price to decrease the risk that they will not be able to allocate all the issuance to price-sensitive public markets investors.

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Advisors: Professor Daniel Xu, Professor Shawn Santo, Professor Grace Kim| JEL Codes: G3, G33, G24

Where Did the Money Go? Impact of the ECB’s Corporate Sector Purchase Program on Eurozone Corporate Spending

By Tina Tian   

Slow corporate growth and a lack of corporate investment has plagued European markets for the past decade. As a response, the ECB began the Corporate Sector Purchase Program (CSPP) in 2016 to provide liquidity to corporate debt markets through bond purchases. Four years after the start of the program, this paper assesses its impact by looking at how companies spent this money on a micro level. In particular, it looks at the impact of long-term debt on five expenditures (fixed assets and R&D, cash balances, short-term debt, cash to shareholders, and share buybacks). We test these hypothesized expenditures based on financial statement panel data from a selection of European firms whose bonds were purchased by the ECB. The results show an increase in financial expenditures including cash balances and short-term debt and a decrease in productive investment expenditures such as fixed assets and R&D. This indicates a lack of efficacy of the corporate bond purchase program as excess liquidity provided by the ECB went towards eurozone companies refinancing existing debt rather than investing in growth ventures.

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Advisors: Professor Connel Fullenkamp, Professor Kent Kimbrough | JEL Codes: G3, O16, E58

Exploring an Alternative to Student Loans- Constructing the Demand for Income Share Agreements

By Paul Zimmer and Alex Hilsenrath

With the rapid growth in the US student loan market and rising default rates in the space, students and universities have begun to explore other methods to fund rising undergraduate education costs. This paper will seek to analyze a proposed financing solution, exploring a theoretical market for a financial mechanism known as an Income Share Agreement, or ISA. Currently, the market for ISAs is relatively unpenetrated and not institutionalized. Under a theoretical institutionalized market, the paper will pursue a framework which compares a student’s preference for an ISA versus a private student loan. The objective is to determine under what circumstances and what variables determine when a student will prefer an ISA versus a private student loan, and vice versa. We first evaluate a student’s CARA utility function under an ISA and under private debt. We find that under some degree of risk-aversion, the individual will strictly prefer the ISA financing option. Next, we introduce the concept of moral hazard in the student’s optimization problem. When solving the optimization problem, we determine that a relationship exists between degree of risk aversion, variance of the income distribution, principal amount borrowed, and student’s earning ability when choosing between an ISA and a private student loan. We then examine this relationship in the context of a mixed financing strategy and solve for the optimal mixed financing bundle. Finally, we introduce the concept of adverse selection based upon asymmetric information between the borrower and the financier.

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Advisors: Professor Curtis Taylor | JEL Codes: I2, I22, I23

How Expensive Is This Suit? An Analysis of Corporate Litigation Settlements and Brand Value

By Jenny Y. Zhang

Two recent corporate trends include a rise in litigation and companies’ increased emphasis on branding. This paper examines whether there is a relationship between the two phenomena by analyzing corporate litigation outcomes and brand value. Specifically, I examine law suits resulting in a settlement in order to determine whether a company’s brand value impacts the settlement amount. I do not find evidence of a relationship between a company’s brand value and the settlement value. Further research is needed in order to more conclusively determine whether a company’s brand value and the resulting settlement are related.

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Advisors: Professor James Roberts, Professor Michelle Connolly, Professor Grace Kim | JEL Codes: K40, K41

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