City University of New York (CUNY) CUNY Academic Works All Dissertations, Theses, and Capstone Projects Dissertations, Theses, and Capstone Projects 9-2018 Three Essays on Capital Structure and Cross-Listing Saeed Ghasseminejad The Graduate Center, City University of New York How does access to this work benefit ou?y Let us know! More information about this work at: https://academicworks.cuny.edu/gc_etds/2841 Discover additional works at: https://academicworks.cuny.edu This work is made publicly available by the City University of New York (CUNY). Contact: [email protected] Three Essays on Capital Structure and Cross-Listing by Saeed Ghasseminejad A dissertation submitted to the Graduate Faculty in Business in partial fulfillment of the requirements for the degree of Doctor of Philosophy, The City University of New York 2018 Three Essays on Capital Structure and Cross-Listing by Saeed Ghasseminejad This manuscript has been read and accepted for the Graduate Faculty in Business in satisfaction of the dissertation requirement for the degree of Doctor of Philosophy. Date Professor Armen Hovakimian Chair of Examining Committee Date Professor Karl Lang Executive Officer Supervisory Committee: Professor Lin Peng Professor Joseph Weintrop THE CITY UNIVERSITY OF NEW YORK ii Abstract Three Essays on Capital Structure and Cross-Listing by Saeed Ghasseminejad Advisor: Prof. Armen Hovakimian This dissertation includes three chapters. Chapter one examines the effect of economic sanctions on firms and financial markets. Chapter two studies the effect of culture on cross-listing and CEO turnover. Chapter three looks at how geography influences capital structure. Chapter 1 This paper is the first comprehensive analysis of economic sanctions and measures the effect of imposing and lifting sanctions on the target country's exchange-listed, publicly traded firms and examines how the impact of sanctions on deep state-owned firms differs from their impact on other firms. The paper uses the case of Iran because of its developed financial markets, the length and variety of sanctions, the significant presence of deep state firms in the market, and the unique event of the 2015 nuclear deal which led to lifting some of the imposed sanctions. I find that a direct sanction against a firm or industry leads to cumulative short-term and long-term negative abnormal returns. The effect is stronger for the deep state firms. In the case of multiple sanctions against a firm by different jurisdictions, the effect of the first sanction is the strongest one. This may hint that the widely-held belief that unilateral sanctions are not effective is not necessarily true. The removal of sanctions leads to positive abnormal returns; the positive abnormal returns are weaker for the deep state firms. Firms targeted by economic sanctions decrease their leverage and increase their cash holding to manage their increased risk, and economic sanctions worsen profitability ratios. The paper provides valuable insights into the mechanics of economic sanctions and backs them with robust quantitative analysis. iii Chapter 2 I examine how cross-sectional differences in national culture dimensions affect the probability of CEO turnover and its sensitivity to firm performance after cross-listing by a non- U.S. firm in the United States. I find that three of the Hofstede indexes (long-term orientation, power distance, and uncertainty avoidance) are correlated with a lower probability of CEO turnover. I find for two of the three indexes that when a firm from a country with higher (lower) index than the United States cross-list in the United States, the firm becomes more (less) sensitive to negative performance in comparison with non-cross-listed firms from the same country. This outcome is associated with an increased (decreased) probability of CEO turnover. The two-way effect of the national culture of the host country (the United States) on cross-listed firms suggests that cultural exchange affects corporate culture and consequently influences relevant financial decisions. Chapter 3 This study investigates the relationship between the location of a firm’s headquarters and its capital structure. Using the equity shock of peers firms, with peers referring to location, this study eliminates endogeneity concerns and shows that average idiosyncratic return of peers firms, firms in the same state, determines variation of firm's leverage ratio. Furthermore, using two measures of location, average leverage of firms in the state where the firm is domiciled and average leverage of firms with distance less than 50 miles from firm's headquarters, the study demonstrates that location has a significant effect on the firm's leverage ratios. The location effect is persistent and extends back to the time of the initial public offering. This work concludes that location of headquarters is an essential component of how a firm defines its peers group. iv Acknowledgement I would like to express my gratitude to my adviser Professor Armen Hovakimian for his continuous support, guidance, patience and his extreme generosity with his time. I thank members of my dissertation committee, Professor Lin Peng and Professor Joseph Weintrop for their constructive comments, valuable expertise and their assistance as the coordinator of the PhD program in finance and the former executive officer of the PhD program in Business. I am very grateful to Linda Allen, Armen Hovakimian, Theodore Joyce, Lin Peng, Robert Schwartz, Kishore Tandon, Jay Dahya, Jun Wang, Liuren Wu, Jianming Ye, and Donal Byard from whom I learned a lot. I would like to thank Karl Lang, the Executive Officer of the PhD Program in Business and Leslie De Jesus, who have always been supportive, helpful, and kind. I am grateful to my fellow students for their friendship. I am forever grateful to my family for their love and help. v Table of Contents List of Tables ............................................................................................................................... viii List of Figures ................................................................................................................................. x Chapter 1: A Financial Anatomy of Economic Sanctions .............................................................. 1 1.1 Introduction ............................................................................................................................. 1 1.2 Literature Review.................................................................................................................... 8 1.3 Background on Iran, Its Economy and Sanctions ................................................................. 13 1.3.1 A Brief History of Sanctions against Iran .................................................................. 13 1.3.2 The Nuclear Deal and Sanctions Relief ...................................................................... 16 1.3.3 The Islamic Revolutionary Guard Corps .................................................................... 18 1.3.4 The Foundation Controlled by the Supreme Leader .................................................. 21 1.3.5 A Brief History of the Tehran Stock Exchange .......................................................... 23 1.4 Data and Methods ................................................................................................................... 25 1.5 Results ................................................................................................................................... 30 1.5.1 Market Reaction to Sanctions and Sanctions Relief ................................................... 30 1.5.1.1 Imposed Sanctions............................................................................................... 30 1.5.1.2 Sanctions Removal .............................................................................................. 33 1.5.1.3 Deep State Firms ................................................................................................. 36 1.5.2 Sanctions and Capital Structure .................................................................................. 38 1.6 Conclusion ............................................................................................................................ 40 Appendix ....................................................................................................................................... 66 Appendix 1.1 A comparison of designation and delisting ........................................................ 66 Appendix 1.2 Exact Dates of US, UN, EU Sanctions .............................................................. 88 Appendix 1.3 A Comparative List of Entities of Interests Sanctioned by the U.S., EU, & UN90 Appendix 1.4 IRGC-Controlled Firms in Tehran Stock Exchange .......................................... 92 Appendix 1.5 List of Firms in This Study and Their Ultimate Owner ................................... 102 Chapter 2: National Culture, Cross-Listing, CEO Turnover, and Sensitivity to Performance ... 111 2.1 Introduction ......................................................................................................................... 111 2.2 Literature Review................................................................................................................ 115 vi 2.3 Data and Method ................................................................................................................. 120 2.4 Results and Interpretation ..................................................................................................