Date of Award


Document Type

Open Access Dissertation


Moore School of Business


Business Administration

First Advisor

Omrane Guedhami

Second Advisor

Chuck C.Y. Kwok


Capital structure can have important consequences for firm value. High leverage increases firms’ probability of bankruptcy, and is shown to be the primary cause of financial distress. As suggested by a strand of literature on capital structure and product market interactions, high leverage is costly because financial weakness could induce unfavorable actions by product market participants such as customers and competitors. While the costs of high leverage are well documented in the extant literature, little is known on the factors that influence the costs of high leverage. This dissertation addresses this gap in the literature by examining how the costs of high leverage, measured by the sensitivity of firm sales growth to high leverage, are influenced by corporate social responsibility (CSR), creditor rights, and national culture.

The first essay examines the relation between CSR and the costs of high leverage. We find that CSR reduces losses in market share when firms are highly leveraged. Our main evidence persists when we use regression of discontinuity design (RDD) and difference-in-difference (DID) to address endogeneity. We also examine whether CSR separately mitigates the high leverage costs driven by customers and competitors. We find that CSR helps high-leveraged firms retain customers and guard against rival predation. Our results support the stakeholder value maximization view of CSR.

The second essay examines the impact of creditor rights on the costs of high leverage. We find that strong creditor rights increase the costs of high leverage. This result lends support to the dark-side effects of strong creditor rights when a firm is highly leveraged. The negative impact of creditor rights on high leverage costs is more pronounced for the types of creditor protection that drive creditors’ hold-up incentives as well as for firms located in countries with developed banking system (rather than bond market system), and firms with higher liquidation costs. When we explore the dark-side effects of creditor rights on specific players, we find that strong creditor rights intensify the adverse responses of customers and competitors. In an additional analysis, we find that creditor rights intensify the adverse responses of employees. Overall, our findings contribute to the debate on the role of creditor rights and shed light on the channels underlying the dark-side effects of creditor rights.

The third essay examines how national culture (specifically collectivism) influences the costs of high leverage. We find that these costs are mitigated in collectivist countries through two potential channels of influence: tight group structures and mental conditioning. This relation is stronger where high leverage costs are more pronounced and where legal systems are less developed. We extend our analysis to include employee and supplier stakeholder groups and find that collectivism helps highly leveraged firms retain employees and obtain trade credit from suppliers. Collectively, our findings suggest that national culture affects corporate financial outcomes by simultaneously influencing key stakeholders in the firm and its environment.


© 2017, Ying Zheng