Date of Award
Doctor of Philosophy
Joseph Halford, Valeriy Sibilkov, Lilian Ng
The dissertation explores several asset pricing and corporate finance related issues including mutual funds, insider trading and institutional investors. My first essay examines risk taking and performance of bond mutual funds. The second essay investigates insider trading, informativeness and price efficiency around the world. The third essay explores whether firms benefit from scale of their nearby institutions in terms of stock prices and corporate policies.
In the first essay, we investigates the risk exposures of bond mutual funds and how risk-taking behavior affects bond fund performance. Bond mutual funds often outperform their respective benchmark bond indexes, but underperform after adjusting for bond market risk factors. We show that risk-taking behavior helps to explain the different performances of bond funds with and without controlling for the risk factors. Results suggest that risk taking leads to higher returns relative to benchmarks in normal credit risk periods, but lower returns in high credit risk periods, and that risk taking is persistent and is primarily driven by poor long-term past performance. Finally, we also find weak evidence that risk-taking funds attempt to conceal their risky bets at mandatory disclosure. The results also indicate that fund investors typically do not differentiate the skill and risk components of fund performance in their investment decisions, thereby inducing bond funds to take risky bets and to affect flows of new money.
The second essay provides the first direct evidence on the impact of enforcing insider regulations on the informativeness of insider trades and stock price efficiency across 44 countries with varying levels of insider trading regulations. Results suggest that insider purchases earn abnormal profits, especially in countries with active enforcement of insider trading regulations. Our study then evaluates the impact of insider trading regulation on stock price efficiency by examining insider trades around corporate earnings announcements. The results show that while insiders trade less before earnings announcements in countries with active enforcement, their stock prices react more to earnings news than those in countries without active enforcement. Overall, our results support the view that effective insider trading regulation promotes price efficiency. Without active enforcement, insider trading not only discourages market information acquisition and reduces stock price efficiency, but also renders insider trading itself less informative.
In the third essay, we study whether and how the geographic mismatch of investors and public firms affects corporate policies, firm valuation and firm performance. Both the U.S. money managing industry and public firms are clustered geographically, but there is considerable misalignment between the two. In this paper, we study whether and how the geographic mismatch between investors and public firms affects corporate financial policies, firm valuation, and firm performance. We measure the investor-firm misalignment at the state level based on the ratio of the aggregate asset under management (AUM) of institutions in a state to the total market capitalization of public firms in the same state (AM Ratio). We find that firm valuation is high when firms are located in states with high AM Ratios and the effects are stronger for firms with higher level of equity dependence. We show that a greater presence of local institutional investors mitigates the financial constraints of local firms. Firms in high AM Ratio states invest more but their investments are less dependent on internal cash flow. These firms are more likely to issue equity while local institutions hold more of the newly issued equity. The high firm valuation in the high AM Ratio states seems to be persistent, but can be affected by shocks to the money managing industry.
Wang, Xiaoqiong, "Three Essays on Financial Intermediary and Insider Trading" (2017). Theses and Dissertations. 1720.