| dc.description.abstract | This dissertation studies the Economic and Monetary Union (EMU) and its
effects on foreign exchange markets and corporate cash holdings. These two potential
effects are examined in the dissertation in two separate essays.
The first essay examines the validity of the purchasing power parity (PPP)
condition during three distinct exchange rate regimes (floating-rate, target-zone
arrangement, and fixed-rate or common currency) from January 1973 through January
2004. My results support PPP, but I find that PPP during the common currency regime
holds in fewer EMU countries than during the alternative exchange rate regimes. In
addition, PPP between currency blocs holds for all countries examined during the first
two regimes, but deteriorates after the introduction of the euro for the EMU countries as
opposed to the non-EMU countries. I do not obtain strong evidence supporting PPP for
the EMU countries since the euro adoption, but the faster mean reversion I observe in
the few EMU countries where PPP does hold, may signal higher market efficiency and
economic integration in the future.
The second essay investigates corporate liquidity (cash holdings of firms) from
15 European Union (EU) countries [12 Economic and Monetary Union (EMU) countriesthat adopted the euro, and 3 non-EMU countries] from 1993 to 2002 using a dynamic
panel data model. My main contributions to the corporate liquidity literature are fourfold.
First, I provide evidence that creditor rights also affect corporate liquidity and their
effect is more consistent than that of shareholder rights. Second, I show that the recent
formation of EMU affects corporate liquidity. Debt and net working capital are better
substitutes for cash in EMU countries than non-EMU countries. The adoption of a
common currency reduces cash holdings in EMU countries. Third, my results suggest
that agency theory plays an important role in explaining corporate liquidity. In particular,
the agency view explains corporate liquidity better for EMU firms, probably because of
an enhanced capital market integration that weakens the transaction and precautionary
motives of holding cash. Fourth, I show that dealing with the endogeneity problem in
corporate liquidity studies is important. | en |
