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(2021)ThesisThis dissertation consists of three essays on shareholder activism and corporate governance. The first essay develops and validates a method to identify shareholder activism campaigns using a data-driven approach based on investor characteristics. The proposed identification can replace or complement the current method used in finance research that identifies shareholder activism campaigns based on a subjective evaluation of regulatory filings. It overcomes the ambiguity associated with the current approach and allows for a more accurate and consistent examination of activism that is also replicable. I show that professional investment manager status, investment portfolio size, and track record of proxy solicitations are important determinants of board turnover, which is the most common channel for influencing control by activist investors. The second essay provides evidence that activist investors improve the operation of the director labor market and profit from its imperfections through their superior ability to match directors to firms based on the director's specific expertise. I show that long-term returns are higher when a director is appointed to the target, especially when their prior experience makes them a good fit. Understanding that complex turnaround campaigns are only launched when a matched director is available provides insights into the collective action problem of disengaged investors, which is inherent in the regular director nomination process. I also highlight that takeovers are a similar reallocation of human capital because the firm is matched to new managers and directors. This is an overlooked point in activism research that frames takeovers as an efficient reallocation of financial capital only. The third essay examines insider trading activity by blockholders and compares their performance to executives and directors. Blockholders are expected to be important monitors, yet the findings reveal that they are less informed because their trades earn significantly lower abnormal returns compared to other insiders that purchase their company's stock. Using insider trading data extracted directly from regulatory disclosure allows for a classification of investor types and the examination of heterogeneity in trading patterns for different blockholder groups. I show that active blockholder trades are significantly more informative compared to other financial blockholders, indicating that they are considered active monitors by the market.
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(2021)ThesisThis thesis consists of three studies on market efficiencies from the perspective of investor sentiment, anomalies and institutional trading activity. The first study explores the effect of Christmas sentiment in the US on pricing of stocks that produce Christmas gifts, termed Christmas stocks. Christmas sentiment increases to the highest before Christmas and subsides after 25 December. High Christmas sentiment induces overpricing for Christmas stocks, and when sentiment subsides the correction of overpricing takes place and Christmas stocks realize significantly negative abnormal returns. This study shows that investor sentiment related to one particular event will induce overpricing for the stocks that are directly related to such events. The second study examines distress anomaly, defined as stocks with high default probability tending to have lower future returns, among stocks with different dividend payout policies. This study finds that distress anomaly is particularly pronounced among non-dividend-paying stocks because these stocks are associated with a high level of information uncertainty. When there is more information asymmetry for one stock, it is harder for investors to interpret stock value from public information. Therefore, distress anomaly is exacerbated among stocks with high information uncertainty, for example non-dividend-paying stocks. This study also finds weak evidence of distress anomaly among dividend-paying stocks. The distress anomaly among dividend payers is not due to the information uncertainty hypothesis. The overpricing of distressed stocks among dividend payers is due to dividend-loving investors’ attention to dividend payments and inattention to capital gains. The third study examines institutional trading activity for mispriced stocks when stocks are taking on anomaly-defined characteristics and finds that hedge funds prevail over non-hedge funds in trading mispriced stocks. Non-hedge funds trade contrary to anomaly prescription by buying more stocks that are overvalued rather than undervalued before portfolio formation and their trading activities exacerbate anomaly mispricing. In contrast to non-hedge funds, hedge funds exhibit no such trading patterns. Furthermore, by examining the actual trading performances, this study shows that non-hedge funds lose significantly from trading overpriced stocks, while hedge funds profit from trading undervalued stocks.
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(2021)ThesisThe WM/R FX benchmark fix rate is regarded as the most important benchmark rate in the foreign exchange (FX) market. Due to the recent FX price fixing scandal, the Financial Stability Board (FSB) on February 15, 2015, recommend widening the benchmark fix window and the addition of new data feeds to the fixing process. The market design change is regarded as a highly effective measure required to enhance the quality and integrity of the fixing process. The dissertation is motivated by the recent FX market design change and my recent work experience on the WM/R benchmark fixing surveillance project, which is administered by Thomson Reuters. The contribution of the dissertation is three-fold. The first chapter examines the effectiveness of the market design change on benchmark efficiency and market quality using an event study and a difference-in-difference methodology. I find that benchmark efficiency and market quality decreased significantly after the market design change and the benchmark fix price no longer represent the FX prices during the fix window. The second chapter decompose the overall effect of the market design change into two sub-components using state space modelling. I find that the effect due to widening of the fix window contributes between 32% and 99% to benchmark efficiency and market quality, and the effect due to the addition of new data feeds contributes between 0% and 39.8% to benchmark efficiency and market quality. The third chapter develops alternative fixing mechanisms for the WM/R benchmark fix using call auction frameworks. Madhavan (1992) predicts that the call auction is better than the continuous trading mechanism in the presence of high information asymmetry and excessive price volatility. Using agent-based simulation, I compare the performance of the new call auction fixing mechanisms relative to the existing WM/R fixing mechanism. I find that the new call auction fixing mechanisms with call-time randomization and price collars produces greater allocative efficiency, price efficiency and lower price volatility. The analysis has major implications for regulators and benchmark administrators seeking to improve the efficiency and quality of the WM/R benchmark fixing methodology.
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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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(2021)ThesisThis thesis aims to provide new insights on the different mechanisms that facilitate innovation and their relative importance in driving growth. Innovation is an important engine for economic growth and considerable effort has been devoted in understanding how technical change drives aggregate growth. Most literature in the field has focused on counting patents or survey based work of particular industries, for short samples. In this thesis, we open new avenues for research in firm innovation creating firm level measures that are available for long time series and across all industries (manufacturing and service). We propose three different measures that allow for the identification and classification of firm products, process and product innovations, and clean technologies at the firm level for public and private firms. Furthermore, we propose methods of aggregating these measures at the industry and economy level. We use the newly proposed measures in applications ranging from firm value in corporate finance to aggregate economic impact in macroeconomics. The new proposed measures allow for differentiation across innovation mechanisms that are paramount for setting innovation policy \citep{klenow2019, Hall2011, Atkeson2019}.
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(2021)ThesisThis thesis examines the role of public information on equity prices. In the first study, we add new evidence that news increases investor disagreement. First, we find that stock prices are convex in relation to news, confirming that prices on news days reflect the risk compensation of opinion divergence. Second, using unexplained trading volume as a proxy for investor disagreement, we find that investor disagreement is positively priced in the cross-section, confirming that news increases investor disagreement. Finally, we distinguish empirically between two competing channels regarding how trading volume gets incorporated into asset prices when trading volume is a proxy for disagreement. We find that news-day unexplained trading volume is associated with high liquidity and low average bias, which reduces the effect of optimistic views. In the second study, motivated by the existing evidence that investors misreaction to news generates skewness and creates mispricing, we draw novel evidence that investors inability to interpret news correctly contributes to the pricing of skewness. Specifically, we find that only the skewness extracted from observed corporate news-day returns is negatively priced. This effect is particularly pronounced for stocks with greater asymmetric responses to good and bad news, and investors lottery preferences do not explain these results. Collectively, our findings suggest that accounting for endogeneity in skewness rather than treating skewness as an exogenous characteristic (lottery feature) of the return distribution is critical for understanding the negative relationship between skewness and future returns. In the final study, we examine the effect of Mercury Retrograde on stock market returns. Focusing on market indexes in 48 countries, we find that the average market returns in Mercury Retrograde periods are about 3.22% annually lower than those in other periods. This effect comes from a belief channel: investors who hold an astrological belief that Mercury Retrograde can destroy their decision-making will stay away from the market. This belief results in a higher risk premium required by remaining investors in sharing more risk. We further confirm that this belief channel concerns belief in ancient Greek culture, highlighting the importance of ancient culture in equity prices. Collectively, our findings suggest that investors may deem some ancient cultures important and behave accordingly.
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(2021)ThesisThis dissertation focuses on exogenous regulatory changes, which allow us to provide quantitative causal evidence on the impact of pre-and post-trade transparency and alternative order books on market quality. First, we study how increasing informational asymmetry due to declining broker ID disclosure affects market liquidity for individual and institutional investors and their trading behaviour at the trading level and on an order level, respectively. We investigate three unique policy changes regarding broker ID disclosure conducted on the Helsinki stock market. We find that transaction costs overall improve with an enhanced level of information disclosure. The reintroduction of ex-post broker identities improved transaction costs by over 36.8bps at market level and 15.6bps for buyer-initiated orders. Overall market volume declined by 0.1% when ex-post broker identities were removed and increased by 0.02% when ex-post identities were reintroduced. Second, we explore how trading via systematic internaliser (SI), investment firms dealing on their own account outside a regulated market and are a counterparty, not a trading venue, relates to overall market quality. We are the first to provide quantitative causal results, showing that on an aggregate level, SI trading, driven by limit-order SI trading, seems to improve market quality by enhancing competition in the limit order book. Limit-order SI trading lowers transaction costs significantly. Autocorrelation and variance-ratio improve at a highly significant level. The findings are essential to evaluate SI trading on a quantitative basis, allowing regulators to evaluate decisions and provide a foundation for future discussions on internalised trading. Last, we examine the level of informed trading in SI and periodic call auction trading and how it drives price discovery on the lit trading venues. Both forms of trading offer less pre-trade transparency than the central-limit-order book but are much more transparent than dark pools. Literature has yet failed to quantify how those forms of trading contribute to price discovery. We show the level of informed trading depends on the liquidity of the individual security. For constituents of the FTSE 100 index, periodic auction trading is the most informed form of trading after CLOB trading, whereas SI limit-order trading is the least informative.
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(2021)ThesisThis paper explores extensive asset allocation possibilities and asset pricing tests shedding light into the cross-sectional and time-varying nature of combining multi-asset alternative risk premia. Existing literature in the multi-asset risk premia space is limited in terms of allocation studies as most research on combining factor exposures are only in the single-stock equity space. The literary gap is further exacerbated over the last decade with the explosion of new factors discovered. To address this, key asset allocation techniques commonly used in allocating across long-only traditional asset classes and equity factors are applied to multi-asset risk premia. The results seem to suggest the key assumptions of expected returns, followed by expected risks, higher moments and then lastly correlations in this order of importance are associated with building portfolios with higher risk-reward. To the best of my knowledge, this is one of the first papers that provide a comprehensive and practical study of a wide array of portfolio implementation approaches to multi-asset risk premia. This paper serves as an annex for investors to better understand the interaction and concentration of multi-asset risk premia exposures to meet their desired investment profiles.
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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.