Essays on Information Asymmetry and Financial Institutions
Essays on Information Asymmetry and Financial Institutions

Author: Nelson Costa Neto

Publisher:

Published: 2012

Total Pages:

ISBN-13:

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The thesis consists of three chapters that investigate informational asymmetry mechanisms surrounding financial institutions. In the first chapter, my co-authors and I develop a theoretical model to analyse the effect of competition on the conflict of interest arising from the issuer pay compensation model of the credit rating industry. We find that relative to monopoly, rating agencies are more likely to inflate ratings under competition, resulting in lower expected welfare. These results do not depend on the presence of ratings shopping, but instead focus on the trade-off between maintaining reputation (to increase profits in the future) and inflating ratings today (to increase current profits). In the second chapter, I document a direct link between stock mispricing, as proxied by mutual fund flow-driven price pressure, and corporate investment. One standard deviation increase in stock price pressure leads to an increase of 1.3 percent in investment. High price pressure firms with high investments have lower future stock returns and lower future operational performance than high price pressure firms with low investments. Investment sensitivity to price pressure is stronger for firms that are less financially constrained, firms with high churn rates (shorter horizon) and firms with high R&D intensity (with more opaque assets). Finally, investment sensitivity to price pressure remains positive and significant for firms that do not engage in seasoned equity offerings around the investment period, suggesting there is a channel between stock price pressure and corporate investment that is independent of external financing. The third chapter documents a pronounced market timing ability of institutional investors when it comes to selling individual stocks. Based on more than 8 million institutional trades over the period 1999 to 2009, my co-authors and I document that (i) large (block) sales of institutional investors correlate with future negative excess returns, while stock purchases do not predict positive excess returns at the stock level,(ii) the one-sided successful market timing of block liquidations is more pronounced if the block represents a larger share of the investor portfolio or/and the stock capitalization, (iii) international investors have a weaker one-sided timing ability for block liquidations. The evidence strongly supports the hypothesis that proximity of block holding investors to management provides important inside information advantages.

Essays in Financial Economics
Essays in Financial Economics

Author: Rita Biswas

Publisher: Emerald Group Publishing

Published: 2019-10-24

Total Pages: 168

ISBN-13: 1789733898

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This volume, dedicated to John W. Kensinger, explores a variety of topics in financial economics, including firm growth, investment risks, and the profitability of the banking industry. With its global perspective, Essays in Financial Economics is a valuable addition to the bookshelf of any researcher in finance.

Three Essays on Corporate Finance and Financial Institutions
Three Essays on Corporate Finance and Financial Institutions

Author: Yan Wang

Publisher:

Published: 2014

Total Pages:

ISBN-13:

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"This dissertation consists of three essays. The first essay provides a systematic way to distinguish informed institutional trades from uninformed ones based on the relation between institutional trades and sequential public information. By studying actively managed U.S. institutions from 1994 to 2010, I show that institutional trades initiated by managers responding proactively to upcoming informational signals strongly predict future stock returns. A hedging portfolio based on these trades generates an average risk-adjusted abnormal return of approximately 3% per quarter. The predictability is more pronounced for stocks with higher information asymmetry, such as those of firms with high volatility and young age. I also find that the most informed institutional traders are likely to have short-term investment horizon, large block holdings, high industry portfolio concentrations, as well as reside in financial centers. My results indicate that the informedness of certain institutional investor groups is substantially reduced after Regulation FD. The second essay examines the product market impact of minority stake acquisitions. We show that partial equity ownership between rival firms has a significant impact on industry competition. Industry-level tests indicate that acquisitions of a minority stake in competing firms' equity are followed by higher output prices and higher price-cost margins, particularly in industries with high barriers to entry. Stock-price reactions of non-participating competitors of the acquirer and target are positive while announcement returns of customer firms are negative. Moreover, the positive (negative) stock-price reaction of competitors (customers) is more pronounced when the acquirer and target are larger firms with greater market share. These results indicate that equity ownership of rival firms dampens competition in an industry.The third essay examines whether foreign firms by listing on or delisting from regular U.S. stock exchanges affect their U.S. counterparts. We find that they do - negatively for listings and positively for delistings, - and the impact is especially profound for the listing events. The U.S. counterparts of foreign firms belonging to the same industry experience severe underperformance in the short- and long-run across a variety of financial and accounting performance metrics, such as firm returns as well as growth in sales, profits, total assets, and capital expenditures. For example, the average 60-day cumulative abnormal return of U.S. firms around the foreign listing date is negative 2%, while the 36-month post-listing return is negative 4.3%. This result is present among listings with and without U.S. equity issuance. In addition, incumbent U.S. firms experience changes in their financing policies and a reduction in analyst coverage following listings of competing foreign firms in the U.S. Our findings therefore highlight an important role of international markets in influencing U.S. firms and markets. " --

Three Essays in Corporate Finance and Financial Institutions
Three Essays in Corporate Finance and Financial Institutions

Author:

Publisher:

Published: 2014

Total Pages: 394

ISBN-13:

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This thesis conducts empirical studies related to financial institutions and corporate finance. Specifically, I look at banks' lending behavior, performance of leveraged buyouts (LBOs), and the cultural impact on cross-border LBOs. Following an introduction in Chapter 1, in Chapter 2, I study U.S. commercial banks' herding behavior in their domestic loan decisions, where herding is defined as the extent to which banks deviate from the industry average lending decisions and collectively increase or decrease loans to certain categories. I find significant evidence that herding exists and that banks tend to herd more when the economic condition is less favorable, regulation is tight, and when banks are struggling . Overall, these findings support the hypotheses of information asymmetry and regulatory arbitrage as motivations for herding. Chapter 3 provides a comprehensive study of LBO deal characteristics, participants' involvement, and their impact on target firms' performance. I find that better post-buyout operating performance is associated with larger amounts of leverage added during the LBO process, tighter LBO loan covenants, and equity contribution by target firms' incumbent management. LBOs are more likely to exit through an IPO or a sale if they use more bank debt with tighter covenants and are sponsored by private equity (PE) firms of high reputation. These results suggest that the main source of value creation in LBOs is the reduced agency costs through the disciplining effect of debt, closer monitoring by lenders, and the better aligned management incentives. PE reputation is also important in ensuring successful deal outcomes. Chapter 4 (co-authored) examines the impact of cultural differences between PE firms and target firms on the completion of cross-border LBOs. We find that cultural distance between PE and target firms reduces the likelihood of buyout completion and increases the time between buyout announcement and completion. We also find that club deals moderate the negative (positive) impact of cultural distance on the likelihood (the duration) of LBO completion. This mitigation effect is through the increased familiarity channel of club formation. Our findings contribute to the literature that underscores the importance of culture in economic outcomes.