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(2021)ThesisThe aim of this thesis is to utilise transnational regulatory network (TRN) theory to examine the effectiveness of the regulatory framework promulgated by the International Organisation of Securities Commissions (IOSCO) — to address the activities of transnational hedge funds. Scholarship employing TRN theory has not previously accounted for the distinctive role that IOSCO — a body well-described as a TRN — has played in developing hedge fund regulation to prevent, identify and mitigate systemic risk related to transnational hedge funds. It is a gap that this thesis attempts to fill. This thesis asks whether and in what ways the IOSCO framework contributes to systemic risk mitigation in relation to transnational hedge funds operating at the global level. It does so to help academics and policymakers to better understand and appreciate the value, and overcome the limitations of IOSCO in this respect. Using the case studies of the failure of Long-Term Capital Management at the end of the 20th century and the demise of Bear Stearns’ hedge funds during the global financial crisis, it argues that it is the systemic hazards posed by hedge funds that make them merit extra regulation at both national and transnational levels. Deploying the findings of the TRN theory, it further demonstrates that the IOSCO framework for transnational hedge fund regulation holds not only advantages to be maintained but also shortcomings to be overcome in addressing these systemic hazards. The significance of this study lies in its contribution to advancing comprehension of the global regulatory framework for transnational hedge funds. It makes the advance by introducing a focus on systemic risk mitigation, hitherto lacking, and developing a critical, doctrinal understanding of the relatively understudied rules and standards under IOSCO.
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(2021)ThesisThis thesis consists of three chapters that investigate the linkage between uncertainty and corporate investment decisions on an international basis. In first chapter, I investigate the extent of U.S. policy-related spillovers into 22 other real economies. I find that, after accounting for factors previously used to explain corporate investment, US Economic Policy Uncertainty (US EPU, hereafter) fluctuations affect foreign corporate investments through two channels. First, the single effect of US EPU on international corporate investment shows an unequivocal negative relation (the direct channel). Second, an increase in US EPU also attenuates the negative sensitivity of corporate investment towards the cost of capital (the indirect channel). Further, I find that while the direct channel of US EPU on corporate investment persists across several subsamples, its indirect channel relates to a high degree of dependence on the U.S. economy and opacity exhibited by local economies. The second chapter reconciles the contrary views on the foreign investors using local disaster shocks from 46 countries over the period 1998-2018. I find that local disaster shocks cause significant disruptions to corporate investments, but foreign institutional investors attenuate the costs of disaster risks. The benefits associated with foreign institutional investors are not uniformly held across all economies, where the role of foreign institutional investors is particularly measurable in countries with well-developed institutional environment. The third chapter focuses on the uncertainty at domestic level using national elections across 23 different countries. I find that the corporate investment cycle corresponds with the timing of national elections, but there is a cross-sectional difference in the firm-level investment sensitivity to elections. During election periods, while firms temporarily reduce investment expenditures relative to nonelection years, the decline is mainly sourced from firms with greater political exposures. Further, I find that the investment cycles are more volatile when the election outcomes are uncertain, and the institutional environments are weaker.
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(2022)ThesisThis dissertation consists of three essays on asset pricing and market microstructure topics within the U.S. corporate bond market. The first essay investigates asymmetry in price pressure between customer buy and sell orders and demonstrates that it is a valuable measure of downside liquidity for corporate bonds. While evidence of a characteristic premium for illiquidity in the cross-section of corporate bonds is mixed, aggregate liquidity asymmetry has high explanatory power for the time series of market returns. Its statistical and economic significance justify it as a credible asset pricing factor. Average market-wide liquidity asymmetry comoves with interest rate and credit spread changes, investor sentiment, funding liquidity, dealer inventory, exchange-traded fund flows, and post-crisis regulatory change. The second essay documents the properties of market-wide corporate bond liquidity and demonstrates that liquidity risk is an important determinant of returns. In market downturns, transaction costs rise for sellers and fall for buyers. The negative relation between buyer and seller liquidity motivates a new across-measure liquidity factor that incorporates an asymmetric liquidity component. Shocks to market-wide liquidity explain a large portion of bond return variation in the time series. Primarily driven by the asymmetric component, the liquidity factor attracts a cross-sectional risk premium that is robust to controls for credit, equity, and interest rate factors, as well as the illiquidity level. The third essay provides new evidence of retail investors’ ability to predict returns based on transactions in U.S. corporate bonds with equity-like risk. Retail order flow is persistent and contrarian, and it predicts future returns in the cross-section. The profits of an equal-weighted, long-short strategy that buys (sells) bonds that experience high (low) net retail buying are economically meaningful. The alpha based on decile portfolios is significant at the 10% level when controlling for common equity and bond risk factors. However, due to high transaction costs and because retail purchase volume is concentrated in underperforming bonds, retail traders lose money in aggregate.
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(2022)ThesisUsing the VC industry as a laboratory, we investigate whether incidental in-person interactions between people working in close proximity facilitate their future collaboration on projects of significant economic value. Our analysis exploits urban topological features surrounding VC fund offices that generate exogenous variations in the likelihood of incidental in-person interactions. We show that such variations influence syndicate partner choice among VCs within narrowly defined (walkable) geographic zones. Workplace smoking bans affecting social smoking appear to reduce such effects. Weather patterns that exogenously restrict VC fund managers’ outdoor activity are also shown to moderate the role played by incidental encounters. Our results cannot be explained by VCs’ characteristics, prior relationships, and portfolio firms’ locations. Finally, syndicated deals driven by in-person interactions do not appear to generate superior returns.
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(2021)ThesisBoth industry and academic research document the sustained outperformance of Australian small capitalisation (cap) managers with regard to market benchmarks and standard academic models. In contrast to both their large company peers and overseas fund manager returns, the high relative returns generated by these small company managers have continued despite increased competition from new managers. This paper confirms the persistence of these anomalous returns and explores the sources of alpha generation by Australian small cap managers. The commonly used Carhart factor model does not explain the persistence of this alpha. Carhart alpha averages 0.3% per month for the group, with 22 out of 46 funds having statistically significant alphas. By adding a combination of factors to the standard Carhart model approximately two thirds of this alpha can be explained. These factors include betting against beta, avoidance of stocks with lottery characteristics, a preference for stocks with strong profitability and strong balance sheets while avoiding ‘junk’ stocks. After controlling for all these factors, average alpha declines to 0.08% per month with only four funds still having statistically significant alpha. While most managers avoid high beta and lottery stocks, the better performing funds demonstrate higher loadings away from lottery and distressed stocks and towards profitability factors than their poorer performing peers.
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(2023)ThesisMy thesis consists of three essays. My first essay is on relative strength anomalies. After long being one of the main puzzles in asset pricing, momentum has ironically become a case of observational equivalence. It can now be explained both by behavioral factors capturing mispricing and by the neoclassical-inspired investment q-factors. Besides, q-factors explain the related 52-week-high anomaly. We note that recent tests subsuming both anomalies are unconditional exercises while the bulk of momentum profits are predictable and occur in bull markets and after periods of low volatility. Comparing asset pricing models conditionally, we find the unconditional fit is misleading. The models fit well most of the time but not when the profits are produced. Noticeably, q-theory implies time-varying loadings that are not consistent with the data. On the other hand, consistent with an underreaction channel, earnings announcement returns and analyst forecast errors both decrease steeply with lagged volatility. My second essay is on portfolio optimization. We comprehensively examine whether advances in the asset-pricing and covariance matrix literatures can jointly improve the out-of-sample (OOS) performance of mean-variance efficient (MVE) portfolios. Focusing on the 500 largest stocks, we find that, after accounting for transaction costs, MVE portfolios formed using improved inputs do not outperform the passive strategy. However, their after-cost performance can be substantially improved by combining several ideas available in the literature. Portfolios that simultaneously target risk, manage transaction costs, correct the covariance matrix for OOS errors, and use simple linear Fama-MacBeth return forecasts attain net Sharpe ratios greater than one, significantly outperforming the passive portfolio. My third essay is on factor momentum. Factor momentum recently joined the ongoing debate over the causes of stock momentum. We find that neither momentum in “off-the-shelf” factors nor momentum in high-eigenvalue principal component factors can explain any previously proposed momentum driver. Also, compared to previous drivers, factor momentum does not exhibit superior performance in capturing momentum-like anomalies. Like the competing models, it cannot explain stock momentum conditionally. Moreover, it cannot explain stock momentum after accounting for transaction costs while these can explain the persistence of factor momentum, especially in less systematic factors.
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(2023)ThesisThis thesis consists of three papers on corporate governance, with a focus on firm’s ESG engagement, real earnings management, and short seller scrutiny. The first paper investigates whether firm ESG policies could be attributed to a CEO’s style. We find that firms led by CEOs with not-for-profit sector experience (socially engaged CEOs) possess better ESG ratings and superior real ESG outcomes. They receive higher employee satisfaction ratings, develop more green innovations, and produce fewer harmful emissions. Mirroring the rise of ESG, the proportion of socially engaged CEOs has increased four-fold over the last 20 years. While corporate boards appear to be increasingly selecting these CEOs to enhance their ESG performance, we show that these effects can, to some extent, be attributed to a causal CEO style. Overall, this study suggests that career experience serving the interests of a broader group of stakeholders in the not-for-profit sector better equips CEOs to achieve corporate ESG objectives. The second paper examines the governance role of short sellers on firms’ real earnings management (REM). Exploiting an exogenous shock to short selling costs brought by the RegSHO, we find that short seller monitoring restrains REM. The effect is concentrated in firms with lower costs of REM. Litigation risk and reduced CEO wealth gain from REM are two plausible channels through which short seller threats deter REM. Lastly, we find that short interests on pilot firms increase after the announcement of the RegSHO relative to non-pilot firms, and the effect is concentrated in the firms with high REM. This third paper explores whether EPS-motivated share repurchases attract scrutiny from short sellers, and how firms’ social capital, built up through CSR activities, plays a role in this process. Exploiting the discontinuity of repurchases around the zero-earnings surprise, we find EPS-motivated repurchases lead to more short interests. The firms under the protection of CSR are more likely to engage in EPS-motivated repurchases but suffer less short selling attack. Moreover, we also show that firms intend to rebuild their reputations through more CSR engagement following EPS-motivated repurchases. However, there is little evidence on real environmental outcomes due to such engagement. Collectively, this study highlights short sellers’ monitoring function and provides insights into the insurance benefits of CSR on REM.
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(2023)ThesisThis thesis studies Private Equity (PE), with a focus on recent developments by market participants aimed at addressing new issues and existing problems facing a mature, competitive industry from the perspective of PE investors (Limited Partners (LPs)) and managers (General Partners (GPs)). The first study investigates the value that private market financial intermediaries offer LPs through Funds of Funds (FoFs). This value proposition differs between primary FoFs who invest in new private capital funds undergoing fundraising, and secondary FoFs who invest in mature fund interests sold by LPs. Secondary FoFs circumvent the illiquidity feature of PE investing and have superior performance compared to primary FoFs. There is no evidence to suggest that certain LPs are better FoF investors than others, but investments in FoFs can help LPs learn how to make future private market investments. The second study analyses infrastructure investment through a PE structure. PE investment in infrastructure is a recent phenomenon, allowing institutional investors to receive exposure to infrastructure without requiring direct investments. This has led to increasingly international investment from US and UK managers to the rest of the world in assets that are generally regarded as mature, physically asset intensive and providing essential services. This cross-border activity results in the flow of funds which are affected by asset, country and investor characteristics. Mechanism typically used by PE managers are not as effective when used for infrastructure investments, likely due to the lower degrees of information asymmetry and moral hazard when compared with venture capital and buyout transactions. The third study evaluates one way in which operating partners have become key components of investment strategy for many PE managers by focusing on their appointment to board level positions and evaluating their impact on investee success. Operating partners are more likely to be appointed to the board of the investee when deals are completed in a recessionary and uncertain environment. While the appointment of operating partners to the board generally does not have a significant impact on exit success, operating partners may add value in specialised sectors such as energy. This thesis contributes to the literature on PE and alternative investments. The findings have significant implications for PE investors and managers.
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(2023)ThesisThis dissertation examines various behaviors of directors and shareholders in China, a regime with concentrated ownership and conflicts between the controlling and minority shareholders. Chapter One documents shareholder-shareholder conflicts surrounding board decision-making in two consecutive processes. (1) Tunneling-related board proposal initiation is promoted (deterred) by the largest (minority) shareholders through their appointed directors. (2) Directors appointed by the largest shareholder (minority shareholders) agree (dissent) more on tunneling-related proposals in boardroom voting. Directors appointed by larger minority shareholders more strongly deter tunneling-related proposals’ initiation and dissent more in voting than those appointed by smaller ones. Minority shareholders’ monitoring against tunneling weakens if they are connected with the largest shareholder or management or when the largest shareholder is politically entrenched. Chapter Two finds that minority (the largest) shareholders sell (buy) more shares after their appointed directors dissent in boardroom voting. Smaller minority shareholders sell more than larger minority shareholders. Minority-shareholder-appointed directors’ dissent on tunneling-related (disclosure-related) proposals triggers negative (insignificant) price impacts, and the dissenting minority shareholders subsequently do not significantly sell or buy shares (significantly sell more shares), showing that ‘voice’ and ‘exit’ exhibit substitute (complement) effects. The phenomenon that smaller minority shareholders sell more than larger minority shareholders is mainly found in disclosure-related dissensions. When the largest-shareholder-appointed directors dissent on more disclosure-related proposals than tunneling-related ones, the ex-ante largest shareholding is smaller. However, the largest shareholding is still not too small, and buying for control is still not too costly; the dissenting largest shareholder buys more shares afterward. Chapter Three finds critical independent directors with more monitoring power (nomination, auditing, or compensation committee member, hereafter, ‘CRID’) mitigate tunneling. They pre-emptively hinder tunneling-related proposal initiation, and they dissent less on these kinds of proposals in board voting. Negative post-dissension career consequence helps explain why privately hindering proposals is more attractive than publicly dissenting. Once CRIDs dissent on tunneling-related proposals, shareholders and media react negatively. The adverse reactions of regulators and debtholders focus less on tunneling concerns than topics where they have greater monitoring legitimacy (e.g., disclosure). Greater CRID presence also appears to mitigate (substitute) minority-shareholder-appointed director dissension about tunneling-related proposals.