Finance
Finance Faculty Spotlight
Dr. Arena’s research and teaching focus centers on corporate finance. In a broad sense, the field of corporate finance informs the decision-making process concerning corporate investing and financing decisions. The way that companies raise capital and then allocate this capital across investment opportunities has important implications not only to the wealth of the firm’s shareholders and debtholders, but also to the functioning of the entire financial system and the overall economy. It is also critical to understand how internal control systems offered by corporate governance and external factors (e.g., regulations, taxes and the legal system) might influence corporate finance decisions and the financial performance of corporations.
Dr. Arena deals with many of these intertwining themes in his current research:
- The effect of litigation risk on corporate financial policy. Two recent studies by Dr. Arena show that litigation risk has a significant impact on corporate financial policy. Firms with greater exposure to securities litigation hold significantly more cash in anticipation of future settlement costs. The result is due to firms accumulating cash in anticipation of lawsuits and not a consequence of plaintiffs targeting firms with high cash levels. Another major finding is that firms at higher risk of litigation manage dividend payments and share repurchases to increase their payout flexibility, which allows firms to more easily decrease cash distributions to shareholders if anticipated litigation expenses are actually incurred in following periods.
- Location and corporate debt financing. In another study, Dr. Arena examines the influence of a firm’s geographical location on corporate debt and provides evidence that the higher cost of collecting information on firms distant from urban areas has significant implications on a wide array of corporate debt characteristics. He finds that rural firms face higher debt yield spreads and attract smaller and less prestigious bank syndicates than urban firms. Rural firms attempt to reduce their informational disadvantage by relying more on relationship banking.
- Taxes and corporate debt financing. In a study recently published by the Journal of Corporate Finance, Dr. Arena provides new evidence that differences in international tax rates and tax regimes affect multinational firms’ debt location decisions. This study shows that differences in personal and corporate tax rates, the presence of dividend imputation or relief tax systems, the tax treatment of repatriated profits, and inter-country withholding taxes on dividends and interest significantly influence the decision of where to locate debt and the proportion of debt located abroad.