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(2019)ThesisThis thesis consists of three independent essays which focus on agency conflicts and the role of governance in mitigating such conflicts. The first essay exploits a quasi-natural experiment that imposes stricter restrictions on the executive’s mobility and uses a unique hand-collected dataset to examine the net effect of such restrictions on corporate policies. Firms managed by professional chief executive officers (CEOs) who depend more on outside employment options to diversify their career risks adopt suboptimal corporate policies after such stricter restrictions on mobility. The study uses an additional quasi-natural experiment where professional CEOs replace founder CEOs in exogenous turnovers. The study finds casual evidence that professional CEOs’ exacerbated career concerns aggravate risk-related agency conflicts and thus, influence corporate decisions systematically. This estimation has implications for public policy prescriptions regarding firm-level governance and the design of a flexible labor market that ensures allocational efficiency. The second essay uses a quasi-exogenous regulatory shock to analyze whether forced changes in board composition help to reign in powerful CEOs. The study finds that post-regulation, firms led by powerful CEOs initiate a strategic shift in resource allocation. Firms managed by powerful CEOs increase innovation inputs (R&D expenditures) and produce more innovation outputs (patents) that are scientifically more important and economically more valuable. Investment quality also improves, manifesting in better takeover performance. Such evidence suggests that firms with an independent board can balance executive power, force powerful CEOs to consider other opinions, and reign in value destruction. The third essay uses a unique hand-collected dataset on family ownership and family management of S&P500 firms and shows that firm performance is sensitive to the measurement of family ownership and founder CEO status. The study also documents that variation in the definition of a family-firm may modify the impact of family-firms on strategic investment decisions (Mergers & Acquisitions) and financing decisions. Overall, the findings highlight that the relationship between family-firms and corporate policy documented so far in the literature should be evaluated with caution, as such associations are sensitive to the measurement of family ownership and whether the CEO is the founder of the firm.
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(2019)ThesisThis thesis consists of three independent essays on human capital, risk-taking, and corporate innovation. The first essay examines whether the first-hand experience of doing innovation endows CEOs with a superior ability to evaluate, select, and execute innovative investment projects for their firms. We show firms led by “Inventor CEOs” are associated with higher quality innovation, especially when the CEO is a high-impact inventor. During an Inventor CEO’s tenure, firms file a greater number of patents and more valuable patents in technology classes where the CEO’s hands-on experience lies. Utilizing plausibly exogenous CEO turnovers to address the matching of CEOs to firms suggests these effects are causal. Our findings provide a new human-capital based explanation for why some firms are more innovative than others. The second essay examines whether happier employees are more innovative by exploring the relationship between employee-friendliness and innovation. The study uses the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by various U.S. states as an exogenous shock that shuts off an important external source of employee motivation to innovate. Innovation within employee-friendly firms appears to be largely immune to this external shock, whereas unfriendly firms suffer significant declines in innovation outputs. This is because the intrinsic motivation provided to the employees is powerful enough to make external motivators such as mobility less important. The findings suggest that firms’ investments in the satisfaction of employees play important innovation enhancing role. The third essay examines the extent to which the design of executive compensation contracts addresses the mismatch in risk-preferences of undiversified managers and diversified shareholders. Exogenous variations in manager risk preference are obtained from externally triggered negative mobility shocks. These shocks raise the cost of a performance-related termination while also preventing executives from participating in industry tournaments, both of which make risk-taking less attractive. The study documents that the executive pay-setting process responds to this reduction in implicit risk-taking incentives by increasing explicit risk-taking incentives in compensation contracts. The results shed light on the extent to which the structure of executive compensation is chosen with the alignment of the risk-preferences of managers and shareholders in mind.
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(2019)ThesisTheoretical works have illustrated distinct roles of risk and uncertainty in financial markets. However, there is no consensus on measurement of uncertainty. Financial uncertainty and macroeconomic uncertainty are commonly proxied separately by the volatility of stock returns or key macroeconomic variables, respectively. This thesis first proposes a portfolio-based uncertainty measure PBMEU that aims to capture aggregate uncertainty in both financial markets and the macroeconomy. When there are significant and persistent economy-wide shocks, the PBMEU produces higher level of uncertainty than the sum of financial and macroeconomic uncertainties, and is associated more significantly with shocks to the macroeconomy. This asymmetric effect cannot be achieved through commonly used proxies of uncertainty. Using the proposed measure of uncertainty, this thesis revisits the negative premium documented for different uncertainty proxies and finds that its significance is sensitive to the control of risk factors. When the macro factors are controlled in examining the stock returns' exposure to uncertainty, the negative premium is weakened significantly for some of the uncertainty proxies. Overall, the premium is largely dependent on what uncertainty proxy measures, e.g. risk, differences in opinion, individual or aggregate level, and real-time or historical uncertainties. This raises concerns of the choice of uncertainty proxies and control variables used to examine the uncertainty premium. Finally, this thesis provides new evidence on distinct roles of risk and uncertainty in financial markets through examining trading activity around the U.S. macro news releases. It documents a sustained increase in stock and option trading activity coupled with a rise in risk and dramatic drop in uncertainty after the release of Federal Open Market Committee (FOMC) statements. Following the non-FOMC macro news, equity trading activity increases moderately as does risk, while uncertainty remains stable. Comparing the trading activity prior to news release with those in non-event days, a significant reduction in both stock and option trades for FOMC news is demonstrated. Meanwhile, a surge in option trades is found before non-FOMC macro news. The results suggest that FOMC news help resolve uncertainty, resolution of uncertainty encourages more trading activity than a rise in risk, and investors actively exploit their insights when there is little change in uncertainty.
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(2019)ThesisThis thesis consists of three empirical studies about corporate finance and banking. In the first chapter, I investigate how CEOs communicate with the market. CEOs have incentives to communicate with their investors after news releases if the market misinterprets the news. I examine how CEOs communicate with the market through their trading patterns. I find that CEOs are more likely to purchase shares after positive and negative news releases, suggesting that they want to confirm their positive news if the market underreacts to it and want to mitigate the market overreaction to their negative news by purchasing shares. These patterns vary conditional on the information environment and news categories. My results suggest that CEOs can make the news salient via their trading pattern. The second chapter uses staggered state-level bank deregulation events in the United States as exogenous shocks to investigate the effects of bank competition on bank liquidity creation at the state level. I document that state-level bank deregulation does not, on average, significantly affect state-level bank liquidity creation, while bank-level analyses demonstrate that enhanced bank competition decreases bank liquidity creation. In addition, I find that states and banks respond to the state-level deregulation events differently. My results suggest that the policy, which is applied to all heterogeneous banks and states in the same way, does not fit all. In the third chapter, I examine how bank CEO debt incentives relate to bank liquidity creation. I find that higher CEO inside debt holdings are associated with lower bank liquidity creation, suggesting that CEOs with higher inside debt holdings adopt more conservative liquidity creation strategies. The result is driven by large banks, suggesting that CEOs in large banks manage banks more conservatively than CEOs in small banks, as their inside debt holdings increase. My results suggest that while regulators could increase bank liquidity creation by imposing lower CEO inside debt holding requirements, it could simultaneously make banks riskier. Debt-based compensation would be a double-edged sword for designing policy about bank liquidity creation and bank soundness.
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(2019)ThesisThis thesis consists of three studies investigating the role of both foreign institutional investors and technology spillovers in the global economy. In Chapter 2, we show that foreign institutional ownership (FIO) positively influences risk-taking, and this positive relation is achieved through direct and indirect channels. FIO is found to be a substitute for country-level corporate governance in determining corporate risk-taking, indicating that foreign institutional investors play a significant role promoting risk-taking in countries with weaker corporate governance. Various robustness tests and careful considerations of endogeneity confirm our main conclusions. In Chapter 3 we examine the effect of technology spillover on a firms’ stock price crash risk. Existing literature suggests that firms readily absorb knowledge leakages from competitor firms. We find that technology spillovers provide the market with better knowledge of the innovation prospects of the firm. This relationship is driven primarily by the transparency of knowledge leakages. Good corporate governance environments facilitate this which further emphasizes the informational role of technology spillovers. The transparency it provides to the potential performance of the firms’ projects offers the market an avenue to discriminate between good and bad projects at an earlier stage, reducing the crash risk associated with bad projects. This reduction in information asymmetry has a real effect on the firms’ capital structure. In particular, the reduction in information asymmetries associated with technology spillovers allows a firm to be less reliant on financial leverage. In Chapter 4, we show that non-target rival firms exhibit positive cumulative abnormal returns (CARs) in a cross-border acquisition. Higher CARs are associated with the size of the potential technology spillovers that rivals can absorb from the acquiring firm. Technology spillovers from cross-border acquisitions have real effects on Tobin’s Q, Total Factor Productivity, and Innovation for the rival firm. The impact of technology spillovers increases with horizontal acquisitions, intellectual property rights, as well as a firm’s absorptive capacity. Our paper sheds new light on the role of cross-border acquisitions in facilitating horizontal international technology spillovers in emerging markets, which has previously been found to have either a negative or an insignificant effect.
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(2010)ThesisThis dissertation is primarily concerned with mixture models for high-dimensional financial data. New flexible mixture models are introduced and implemented with fast and effective optimization routines. The stochastic gradient approach uses random gradients to update the parameters of the mixture model improving the chance of the iterates converging to a higher mode. Chapter 2 provides the details of the stochastic gradient optimization routines used. Chapter 3 suggests two new multivariate density estimators, namely the marginal adaptation mixture of normals and the mixture of normals copula. Their performances are compared with a few recent popular models such as the skewed-t model. Chapter 4 discusses covariance estimation for high dimensional data. The aim of the chapter is to improve the estimation of covariance matrices by using mixture shrinkage priors. This chapter also shows how to apply the priors to the simultaneous estimation of several covariance matrices such as in the case of mixture of normals models. Chapters 5 and 6 consider the estimation or fitting of models to time series data, when the models may experience a small number of structural breaks. Chapter 5 looks at univariate data and Chapter 6 considers multivariate data. In particular, Chapter 6 shows how to estimate a Gaussian vector autoregressive model subject to occasional structural breaks using a mixture of experts framework.
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(2017)ThesisThis dissertation examines the incentives and behavior of the directors of public companies. Boards of directors act as the agents of shareholders and are expected to both monitor and advise managers. Yet, there are obvious conflicts of interest between directors and shareholders that raise doubts on whether directors have sufficient incentives to fulfil their obligations. The existing literature is full of examples that directors in certain situations can have certain perverse incentives that can hurt shareholder wealth. For instance, when directors anticipate the firm to experience negative performance shocks, they may be incentivized to leave the firm immediately to avoid reputational damage and an increase in workload. The first study in this dissertation examines the consequences for directors who leave a firm before the firm experiences certain negative events. I show that directors who leave prior to negative events suffer stronger labor market penalties than directors who persevere through such events. The second study asks the question why independent directors are willing to join poorly performing firms. In this chapter I show that directors who join these firms do not appear to be poor quality directors. In fact, they are more likely to obtain powerful positions on the new boards, which can be one source of the incentives to join troubled firms. The third study in this dissertation examines how director incentive changes when they pledge their company stock as collateral for a margin loan. I document a negative causal relationship between firm value and pledging. I identify two channels via which such value destruction occurs. First, margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, pledging is followed by changes in corporate policies that are consistent with greater insider risk aversion. Overall, this dissertation contributes to the literature on director incentives by examining several issues that have been relatively unexplored.
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(2018)ThesisThe impact of market structure designs on market quality is of interest to academics, practitioners and regulators. Using three exogenous events and with the benefit of proprietary data, this thesis builds on theoretical models and examines the casual impact of three important market structure designs - exchange access fee, tick size, and dynamic price limit - on market quality. First, I provide a theoretical model of the exchange fee structures to show that in a competitive environment, traders optimize the degree of information in their trades to fully exploit fees/rebates. I examine the ‘natural’ experiment of a unilateral Nasdaq exchange fee reduction, and find evidence consistent with the theoretical model which indicates that the expected ‘washing-out’ of the fee changes is offset by the flight of highly-informed market orders to the remaining highest rebate venues. Far from fees washing-out, there is a redistribution of informed traders across venues. Second, I extend the theoretical model to examine the impact of the 2016 U.S. tick size pilot. I show that the information content of trades increases more in markets that subsidise liquidity providers. Moreover, markets subsidising liquidity consumers and off-exchange trades are the major beneficiaries of the sizeable rise in the tick size that acts as an additional transaction tax paid especially by liquidity traders and a corresponding subsidy to limit orders. This sizeable increase in transaction costs means that those uninformed traders that remain in the lit market during the pilot are far more price sensitive, encouraging them to flee venues subsidising liquidity providers in favour of cheaper venues subsidising liquidity consumers.Third, I analyse the impact of the intraday dynamic price limit rule – Limit Up Limit Down (LULD) and High Frequency Trading (HFT) behaviour around price limits on markets with different fee structures. Using difference-in-differences and propensity score matching, I find LULD interferes with trading activity but curbs short-term volatility without delaying the price discovery process. The magnet effect exists and the impact is stronger when approaching the upper price limit. Also, HFT trading activity decreases on market subsidising liquidity providers after the LULD halt which is driven by liquidity taking.
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(2018)ThesisThis dissertation consists of three essays on household finance, with a focus on understanding how housing wealth affect household financial decisions. The first essay uses a novel panel dataset with consumption and income records to study the heterogeneity in house price-consumption sensitivity across and within life-cycle stages. This study finds young homeowners with high income volatility have the largest sensitivity. The influence of income volatility subsumes credit constraint measures such as liquid assets, loan-to-value ratio, and mortgage payment coverage highlighting the precautionary savings nature of this sensitivity. Old unconstrained homeowners with high housing wealth share have significant sensitivity, consistent with the wealth effect. Overall, these two homeowner groups are the largest contributors to aggregate sensitivity while other groups typically have small and insignificant sensitivities. The second essay develops a stylised life-cycle model on optimal consumption with housing and risky labour income and provides analytical solutions. The study shows that while the consumption of older individuals are affected by house prices only due to a housing wealth effect, the young and middle-aged can be influenced by both the wealth effect and a credit-constraint effect, depending on their levels of wealth. Young homeowners with intermediate level of wealth also exhibit a precautionary saving motive, which is influenced by house prices. This model provides a framework in understanding the empirical findings in the literature. The last essay uses a novel panel dataset to investigate whether variations in housing wealth affect individuals' stock market entry decision. The study identifies the impact of housing wealth by examining how house price changes predict the stock market entry of homeowners compared to renters, who experience the same economic conditions but the opposite wealth shocks when house prices fluctuate. The study finds rising house prices lead to higher probabilities of stock market entry and larger initial investment of homeowners compared to renters. Falling prices lead to larger bank savings of homeowners than renters, likely due to a heightened precautionary saving motive. In contrast, renters avoid the stock market and save more when house prices increase, suggesting implicit housing costs limit stock market participation.
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(2018)ThesisThis thesis consists of three essays on corporate executives and boards of directors. In the first essay, using comprehensive executive data from 5,886 U.S. firms from 2000 to 2015, I document that the promotion rate for women is 31% lower than the promotion rate for men. While sorting into executive positions in different functional areas explains a substantial portion of the promotion gap, a gap of 20% remains unexplained. Consistent with the presence of taste-based discrimination, the promotion gap is lower in firms in more competitive product markets. I find no evidence that the gap is lower in firms with more female directors, which suggests that board gender quotas may not increase female management representation. In the second essay, I study CEOs' decisions to fire or retain their subordinates by taking advantage of item 401(b) of Regulation S-K, which requires a company to disclose its executive officers. I find that non-CEO executive departures are highly sensitive to performance. This pattern is stronger for firms that face more stringent monitoring. Contrary to findings in prior literature, this pattern is not simply driven by the CEOs who lose their jobs. In fact, CEOs are more likely to keep their jobs after bad firm performance when their subordinates leave, and executive departures are associated with improvements in future firm performance. My results are consistent with the conjecture that some CEOs fire their subordinates following poor performance and are then rewarded for initiating changes. This study improves our understanding of the factors driving executive and CEO turnover decisions. In the third essay, I examine whether CEO duality facilitates board decision-making and find that CEO duality is associated with shorter M\&A completion time and higher announcement returns. The beneficial effect is more pronounced in firms that lack lead independent directors, firms that are lightly scrutinized by boards and institutional investors, and firms that operate in competitive and fast-paced environment. While shareholders and regulators advocate splitting the CEO and chair-of-the-board titles, my results suggest that CEO duality is not always detrimental, and intense monitoring restricts CEO chairs’ ability to make speedy and superior decisions.