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(2020)ThesisI investigate the role of foreign patents (patents issued in countries outside of the US) in US firms’ patent portfolios. Foreign patents are substantial and prevalent for US firms. Foreign patents form about 39% of the average patent portfolio of US firms. Firms with foreign patent applications are financially stable, and these firms have a higher percentage of foreign sales to total sales. Besides, I exploit exogenous shocks to foreign sales (free trade agreements and bilateral investment treaties) to identify the effect of foreign sales on the propensity to foreign patent. I find firms with a larger percentage of foreign sales have a higher propensity to foreign patent. Additional analysis reveals US firms have a higher propensity to patent in countries with strong patent rights.
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(2020)ThesisThis thesis is composed of three stand-alone research studies relating to the recent unconventional monetary policy adopted by the Bank of Japan (BOJ). The first study investigates the impact of the BOJ’s policy on stock prices and corporate activities. The empirical results show that the policy has generated heterogenous effects on stock prices. Firms with disproportionately higher BOJ investment experience significantly positive stock returns both in the short term and the long term. Corresponding to the positive price impact, the cost of equity capital reduces and firm value increases. However, further tests fail to find evidence of any real impact. Firms that benefit from a reduction in cost of equity capital do not increase external financing, corporate investment and employment. The concentrated capital structure in Japan and the biased investment scheme adopted may explain this weak policy impact. The second study examines whether and how excess reduction in free float affects stock liquidity. Using the BOJ’s equity purchase program as a natural experiment to tackle endogeneity problems, the results show that firms that experience a larger reduction in free float exhibit a reduction in stock liquidity. The negative effect of free float reduction on stock liquidity survives a battery of robustness tests. Further analyses of the underlying channels show that the number of common shareholders and institutional shareholders in a firm significantly decrease. These findings are consistent with a lack of free floating shares introducing frictions in the process of liquidity provision. The third study examines whether an increase in exchange traded funds (ETF) ownership via indexed investment impedes or improves price efficiency. Utilizing Japan’s ETF purchase program as the identification strategy, empirical tests show that prices of stocks that experience an increase in ETF ownership become less efficient in that they deviate more from a random walk and exhibit longer delays in responding to market information. An increase in ETF ownership is also associated with an increase in post-earnings announcement drift, a decline in analyst coverage, and a reduction in the coefficient of current returns to future earnings. These results together suggest that an excessive increase in ETF ownership curbs information arbitrage activities and results in less informative security prices.
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(2020)ThesisThis thesis consists of three stand-alone research projects on corporate ownership structure across countries, insider trading, and passive institutional investors. The first study examines the effect of social trust on corporate ownership structure. Using a large sample of public firms across 42 countries, I find that a culture of trust in a country leads to a more dispersed corporate ownership structure. I also investigate how trust affects the evolution of ownership structure following firms’ IPO and the channels through which trust leads to dispersed ownership. I show that corporate ownership is more likely to become widely held and diffuses at a faster speed in countries with a higher level of social trust. Trust also encourages the selling of block ownership by large shareholders and the use of equity financing by firms. The second study investigates whether fast economic integration but slow legal integration leads to more aggressive insider trading by foreigners in possession of material non-public information about domestic firms. Using a large sample of mergers and acquisitions (M&As) around the world, I find systematically a higher likelihood of insider trading in target firm securities before the announcements of cross-border deals compared to domestic deals. The difference is mainly driven by cross-border deals where the acquirer is from a country with high corruption and low social norms, and where the target is in a country with stricter enforcement of insider trading laws. The third study examines the role of family interest in explaining and influencing individual funds’ voting behaviour. Specifically, I focus on the voting patterns of index funds in the event of corporate M&As. I find that the interest of fund families in the target is significantly positively associated with the likelihood of an affiliated index fund voting for a deal in the bidder merger approval meeting. However, an index fund’s own interest in the target does not explain its voting pattern. A higher level of aggregate bidder ownership held by fund families that have greater active interest in the target is also associated with worse deal performance. Taken together, the evidence suggests that cooperation between active and index funds within fund families potentially weakens the resistance of bidder shareholders to bad mergers.
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(2020)ThesisThe Mandatory Bid Rule (MBR) requires a bidder who acquires control over a firm to make a general offer to all remaining shareholders to purchase their residual shares. It is the most powerful institution that requires controlling shareholders to share the control premium with other shareholders in a control transaction. The MBR is considered to be a key method of protection for minority shareholders, but nevertheless faces strong criticism over high implementation costs and an on-going debate over its effectiveness in practice. From a utilitarianism perspective, the paper shows the relevance between the MBR and the effectiveness of minority shareholder protection mechanisms in a jurisdiction of legal transplantation. Using Mainland China as the test sample where the MBR was adopted, removed then re-introduced, the paper employs the empirical research methodology to highlight market reactions when the rule is removed. The paper analyses the efficiency of the MBR and outlines the types of environments and jurisdictional specifications where the MBR can operate at an optimal level, and alternatively, where the MBR will not be value-maximizing. It offers ideal legislation suggestions for similar jurisdictions considering transplanting MBR.
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(2020)ThesisIn the first chapter of this dissertation, I find that an increase in the likelihood of extreme temperatures leads to a decline in the availability of credit in a region. I also document that for certain loan types, such as a revolving line of credit, the price of credit is increasing in the likelihood of extreme temperatures. Lastly, I find that temperature shocks may propagate from one region to other regions via a bank lending channel. Such indirect exposure, to temperature shocks elsewhere, adversely affects firm-level outcomes. The second chapter of this dissertation focuses on the implications of temperature extremes for small businesses in a region. I find that an increase in the likelihood of extreme temperature leads to an adverse impact on the availability of credit in a region. I find that the average adverse effect of extreme temperatures on credit availability is present for all bank types based on size. The adversity of extreme temperature effect, on credit availability in a region, increases with bank size. In the third chapter of this dissertation, I propose a new heterogeneous-agent stochastic discount factor (SDF) that equals the previous period investment weighted average of agents' SDFs. I implement this SDF on the consumption growth of cohorts of households in the Consumer Expenditure Survey dataset from the U.S. Bureau of Labor Statistics. I use factor analysis to reduce the impact of measurement error present in consumption data. For quarterly data observed at a monthly frequency, the investment weighted SDF reconciles the historical equity premium for relative risk aversion of 7. The proposed SDF fares well when tested using classical asset pricing tests like Hansen-Jagannathan volatility bounds and JT test. The weighting methodology is the primary driver of my results.
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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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(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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(2020)ThesisThis thesis analyzes the impact of CEO characteristics on corporate outcomes. The thesis explores several key characteristics, including their prior work experience. In so doing, the thesis significantly contributes to our understanding of the impact of CEO traits on corporate performance. The first chapter focuses on the relationship between investment banking (IB) experience and takeover performance, emphasizing the role of knowledge spillovers. IB experience yields significant benefits for firms and for CEOs, conveying knowledge and expertise about what types of takeovers and when to do them. The results highlight that IB CEOs tend to engage more in acquisitions, use different, and potentially better methods of payment, and are better able to time takeovers. The results make a significant contribution to the literature, highlighting a factor that prior takeover studies have overlooked, and emphasizing the practical benefit of hiring CEOs with relevant prior work experience. The second chapter explores whether such CEOs might be better able to structure divestitures. The chapter finds that IB CEOs are better able to decide when to divest, are more likely to divest the types of units associated with better strategic outcomes, and know how to use the proceeds efficiently. IB CEOs tend to strategically divest to refocus complex firms and to rectify their acquisition mistakes. They would divest unrelated, geographically distant and underperforming units. IB CEOs are also less likely to waste the divestiture proceeds by distributing them efficiently to shareholders through share repurchases rather than spending on acquisitions. These results contribute to the divestiture literature, by emphasizing the importance of CEO personal attributes for divestiture performance. The third chapter analyzes the impact of CEO characteristics on financial reporting decisions. Firms' financial reports have become increasingly opaque. Thus, the thesis analyzes which CEO attributes might be associated with disclosure practices. The chapter analyzes the role of several CEO attributes, including IB experience, overconfidence, and other career factors. The paper hypothesizes and shows that these CEO characteristics influence not only how readable are financial reports, but also the linguistic style of these reports. The results highlight the necessity of addressing these attributes when improving financial reports’ structure and when analyzing financial reports’ readability.
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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.