Abstract

This dissertation examines the role of corporate communication as a governance mechanism and investigates its impact on the cost of new financing. Both corporate communications and the cost of capital have been concerns for scholars, policymakers, and practitioners.
The first essay examines whether corporate communication is a stand-alone governance mechanism. Corporate communication is measured by length, dictionary, and communication index. Using content analysis techniques, we find two major properties for firms’ communication that together assert the governing power of corporate communications. The first property is the positive correlation between negative deviation from the expected transparency and negative changes in Tobin’s Q, confirming the disciplinary role of corporate communications. And second, the substitution-complementary relationship between corporate communication and other board attributes such as board size, independence, education, expertise, CEO duality, frequency of board meetings, gender diversity, institutional ownership, and product market competition. We also find that communication has a non-linear association with Tobin’s Q and firm’s risk, pointing to the existence of an optimum level for communications. The results are robust when controlling for major corporate events such as mergers and acquisitions, spin-offs, financial distress and bankruptcy, and major lawsuits.
The second essay examines whether firms’ engagement in communication activities, more specifically in investor relations and stakeholder communications (IRSC), reduces the cost of information asymmetry at the time of external financing. The measures of IRSC initiatives are frequency of press releases, frequency of events (meetings, conferences, industry gatherings, and investment bank seminars), the ratio of question and answer to the length of events, the average length of answers, and the frequency of slides used in events. We find that the frequency of press release and the portion of question and answer to the length of meetings have a significant and positive relationship with the cost of financing, which points to the noisy nature of press releases (as a one-way communication channel), the amount of uncertainty around the financing decisions, and the stakeholders’ attempt to clarifying the ambiguity. In contrast, event frequency and the average length of answers have negative associations with the cost of financing, which points to the value of meetings (as a two-way communication channel), firms’ efforts to remove the ambiguity, and market’s appreciation of transparency. Multivariate multiple regression analyses (seemingly unrelated regression models) show that these findings are more pronounced for less transparent firms that plan to issue equity compared to transparent firms who wish to finance through debts instruments.