Essays in Financial Markets

Abstract

This thesis consists of three chapters discussing different aspects of financial markets. In the first chapter, we study why banks actively engage in philanthropic activities. Using data on bank donations to non-profit organizations, we examine the strategic nature of banks’ charitable giving. Our findings show that bank donation decisions are driven by competition in local deposit markets and such donations subsequently lead to a higher local deposit market share. We confirm our results by using exogenous variation in competition based on the application of antitrust laws in banking market mergers and exogenous shocks to the local demand for donations using natural disasters. The increase in local deposit market share can be attributed to banks using their donations to attract non-profit organizations and ethical customers as a source of deposits. We further show that bank donations also lead to an increase in local mortgage origination and in the likelihood of new market entry through new branch openings. Overall, the evidence aligns with the interpretation that banks strategically participate in corporate philanthropy to enhance performance. The second chapter examines the impact of hedge fund activism on employee satisfaction and the emission activities of target firms. We show that employees of target firms are more satisfied with senior management and work-life balance after hedge fund intervention. The increase in satisfaction is related with reduction in frictions in the workplace. From the environmental perspective, we find that target firms’ plants emit less toxic chemicals following hedge fund activism campaigns, which is driven by endeavour to reduce regulatory sanction on violation of environmental laws. Our evidence leans towards the view that hedge fund activism improves the target firm value at least partly by enhancing non-financial performance. In the third chapter, we study how private foundations manage their investments. Using a novel dataset, we show that foundations with financial experts are less likely to delegate their investment to outside portfolio managers whereas an internal investment officer hire is associated with more frequent use of external investment advisers. However, directors with financial expertise do not substantially alter asset allocation compared with non-outsourcing foundations. In addition, our analysis reveals a local bias in the investment adviser choice by foundations. The local bias is weakened when a foundation has financial experts on their board. Our results suggest that financial expertise improves at least the operational process of investment.