Essays in corporate finance and sustainability

Abstract

This thesis consists of three essays on corporate finance and sustainability. The first chapter investigates how dominant business groups affect investment decisions of other standalone firms in the economy. Using intra-group equity transactions within the top 40 largest business groups in Korea, this study finds that high levels of internal capital allocation within the groups exert a negative influence on investments of standalone firms that require external capital. Due to financial market imperfections associated with low investor protections, business groups prefer internal investment rather than outside investment. However, when internal capital allocation is prevalent in the economy, lots of capital is trapped inside business groups and available capital in external markets becomes scarce. Standalone firms outside business groups have difficulties raising external finance and thus reduce investment. The negative influence on investments of business group dominance is particularly pronounced for private standalone firms and the firms that hold fewer tangible assets. Findings in this study suggest a negative externality that business groups impose on other standalone firms: the bias toward internal investment makes it harder for good projects outside business groups to obtain capital. Using a panel dataset of 64 Clean Development Mechanism (CDM) host countries for the 2001-2014 period, the second chapter examines the effect of the CDM on deploying renewable energy at varying levels of domestic financial development. This study finds that the positive effect of the CDM on the deployment of renewable energy is pronounced in countries with less developed domestic financial markets. Given that renewable sectors in less developed financial markets experience shortages of debt and equity financing, the CDM plays an active role in improving access to financing for these sectors. The results suggest that investing in CDM projects to deploy renewable energy is particularly valuable for developing countries with less developed financial markets. The third chapter investigates whether renewable energy certificate (REC) markets work well in Korea. A stable income flow from REC sales is crucial for renewable energy companies. This study examines the relationship between REC price uncertainty and renewable energy investment. Using Korean REC market data, this study finds that a high level of uncertainty regarding REC prices discourages renewable energy investment. Given that the decision to invest in renewable projects is irreversible, it is optimal to postpone new renewable energy installations until REC price uncertainty is resolved. In the solar photovoltaic context, solar project developers reduce investment in power capacity significantly in periods when REC prices are volatile and increase investment when prices are stable. Moreover, small and medium-sized renewable energy plants are more sensitive to REC price uncertainty than are large renewable plants. This study suggests that promoting renewable energy requires a well-functioning REC market that provides stable REC prices.