Are There Invisible Hands in Controlling Product Quality and Protecting the Environment?

This thesis explores whether there are invisible hands controlling product quality and protecting the environment. The first empirical chapter assesses the impact of a product recall on firm value. Using the rational expectation theory, the study explores the market reaction to product recall announcements. The univariate analysis shows a significant negative mean return during the announcement window. The regression analysis shows that mandated recalls lead to a greater negative market reaction. The more severe the product defect, the greater the negative returns. Overall firm value is reduced following a product recall. The second empirical chapter explores the impact of debt on product recall. The thesis argues that debt has a disciplining effect on managers based on monitoring power, restrictive covenants, and rollover risk. The findings show that long-term debt is associated with increased product recall, while short-term debt is associated with reduced product recall. The study further exploits a quasi-natural experiment which controlled for observed and unobserved firm heterogeneity through propensity score matching (PSM). The difference-in-difference (DiD) evidence suggests a causal relationship between long-term debt and product recall. The third empirical chapter explores whether there is an invisible hand protecting the environment. It assesses the impact of debt on incidences of environmental violations. The monitoring power of long-term and short-term debt forms the theoretical underpinning. The findings show that long-term debt is associated with increased environmental violations, while short-term debt is associated with reduced violations. The evidence suggests that the ex-post monitoring of short-term debtholders can exert discipline on managers.

URI

https://bradscholars.brad.ac.uk/handle/10454/20690

Type

Thesis

Qualification name

PhD