The primary market of many US registered ETFs exhibits an oligopolistic structure, which is shown to have relevant implications for the pricing efficiency of those financial products. I show that the ...entry of an additional Authorized Participant (AP) corresponds to a decrease in the magnitude of ETF price deviations from Net Asset Value (NAV) of at least one basis point in ETFs with high primary market concentration. I build a dynamic equilibrium model of ETF primary market arbitrage that describes the trade-off faced by monopolistically competitive APs between waiting for mispricing to widen and pre-empting competitors from eliminating it. In the model, the creation unit size is shown to be an important friction driving the entry decision and, therefore, the magnitude of mispricing. Indeed, in the data, around one-third of all primary market transactions amount to one creation unit, suggesting that it is often a binding constraint. ETF split events and the creation unit size changes help to identify shocks to the dollar value of creation unit size empirically. I show that by cutting the creation unit size in half, mispricing decreases by almost two basis points, a magnitude consistent with that implied by my quantitative model.
I study how fund families’ simultaneous debt and equity holdings affect risk shifting by portfolio firms. Families generate more income from debt in one-third of their dual holding positions; I argue ...their equity in those positions is captured. Firms with more captured dual holders exhibit less risk-shifting behavior. To establish causality, I exploit cross-family fund acquisitions as plausibly exogenous shocks to firm-level captured dual holders. Finally, captured equity votes favor creditors of distressed firms, and CEOs of firms with more captured dual holders have lower risk-taking incentives. Overall, evidence in this paper suggests that fund families internalize risk-shifting effects.
This dissertation is composed of three separate chapters that study the financial decision-making of firms when raising capital through security issuance, and the impacts of regulation on public ...market. Applying newly developed machine learning techniques, I develop new perspectives on the security issuance choices at different stages of a firm’s life cycle. Chapter 1 focuses on publicly traded firms that have access to the capital market and investigates the relationship between firm’s financing expectations and its post-issuance performances. We employ multinomial logistic regression and random forest classifier to model firms’ financing expectations using transaction-level data and accounting for self-selection in security issuance. In contrast to the common view that machine learning techniques are like “black boxes,” our evidence shifts the application of machine learning models to one guided by finance theories. We label firms by propensity to issue various securities given their ex-ante characteristics with substantially improved predictive power. Then, we examine the impact of surprising issuance that is against firms’ financing expectations on the announcement effect, long-run stock performance and operating performance. We find heterogeneous market reaction to security issuance across financing expectations, or “firm-types.” We show market reacts to the type of firm that undertakes a surprise issuance and not to the particular security type per se. Our evidence suggests that firms should consider the market’s expectations before making financing choices, as the difference is economically significant, especially for “equity-type” firms. Chapter 2 presents the first analysis that focuses on the confidential IPO registration process adopted by 86% of firms that attempt to go public. I ask whether valuable information has been produced during the confidential interactions between the firm and Security Exchange Commission (SEC). Motivated by the wide adoption of a confidential revise-and-resubmit process introduced by the Jumpstart Our Business Startups Act (JOBS Act) in 2012, I investigate the information content of the draft registration statement (Form DRS) and its evolution to the formal prospectus (Form S-1). I conjecture that since IPO firms are required to disclose information upon satisfaction of security regulations, the changes made in the content during the revision process should reflect concerns raised in the SEC’s comment letters. Using textual analysis techniques in natural language processing (NLP) literature, I focus on both the changes in the words over time and the context in which the words are used. I construct a novel proxy for the content of SEC comment letters before their release, which leads to a 4.5% cumulative abnormal return. I find that changes in the proportion of positive words are strongly associated with operating performance, reflecting the fundamental value of offerings. Moreover, the evidence suggests that the confidential review process significantly improved disclosure transparency, while SEC has remained neutral in the firm’s decision on obtaining access to the public capital market. Lastly, Chapter 3 extends the research in previous chapter and studies firms’ incentives and disclosure practice of going public via Special Purpose Acquisition Company (SPAC). Since 2018, the U.S. public market has experienced an unprecedented surge of SPAC activities. The conventional IPO and deSPAC merger are both means for private operating companies to debut in the public market. However, the two methods are not subject to unified regulations and procedures, particularly with respect to regulatory oversight. We argue that going public via deSPAC merger is regulatory arbitrage, through which firms circumvent the SEC review process in conventional IPO registration and provide less comprehensive but over-confident disclosures to the public. Using textual analysis, we compare the information content of prospectuses and proxy statements in deSPAC mergers to their propensity-score-matched IPO peers. Our results suggest that, given the current regulatory environment, deSPAC firms tend to disclose less information and avoid using unfavorable languages. Additionally, we show that the differences in the above-mentioned aspects vanish when identical regulations apply in the post-public periodic filings, such as annual report. Further, we document the consequences of regulatory arbitrage. Specifically, firms going public via SPAC experience larger decline in share prices. Our study provides unique evidence in support of improving the existing review procedure in deSPAC transactions, such that the level of information transparency and regulatory oversight is comparable to the conventional IPO process. We call for unified regulations overseeing alternative going-public methods to maintain information transparency and a fair public capital market.
The first essay studies the effect of shareholder empowerment on corporate leasing policy. Exploiting the staggered adoption of majority voting laws that strengthen shareholders’ power in corporate ...director elections, I find that firms reduce their operating leases following shareholder empowerment. I hypothesize that this effect reflects exacerbated shareholder-debtholder conflicts. Consistent with this hypothesis, I find that the effect is less pronounced in firms with better creditor protection. And firms have lower Z scores and fewer geographical segments following the adoption of majority voting laws. Furthermore, I find that lenders charge higher loan spreads and are more likely to require collateral after adopting majority voting laws. The second essay studies the effect of the family-friendly policy on corporate capital structure decisions. Exploiting the staggered adoption of state paid family leave (PFL) laws, I find that firms increase their financial leverage after PFL laws become effective. I explore two mechanisms of the effect. One mechanism is that firms increase their debt to finance increased labor costs. Consistent with this argument, the effect is more pronounced for firms headquartered in states with higher minimum wages and firing costs or states/counties/cities with paid sick leave mandates. Another mechanism is that PFL laws increase employee retention, thus freeing employers’ debt capacity. Consistent with this hypothesis, the effect is less pronounced for firms with lower employee turnover or in states with stricter legal restrictions on labor mobility.
The U.S. stock market’s return during the first month of a quarter correlates strongly with returns in future months, but the correlation is negative if the future month is the first month of a ...quarter, and positive if it is not. These effects offset, leaving the market return with its weak unconditional predictive ability known to the literature. The pattern accords with a model in which investors extrapolate announced earnings to predict future earnings, not recognizing that earnings in the first month of a quarter are inherently less predictable than in other months. Survey data support this model, as does out-of-sample return predictability across industries and international markets. These results challenge the Efficient Market Hypothesis and advance a novel mechanism of expectation formation.
The first paper (“Does Executive Compensation Duration Generate Different Risk Incentives? Evidence on Corporate Hedging”) investigates whether and how corporate hedging policy is affected by ...compensation duration. I find a positive and significant relation between compensation duration and hedging policy. The findings highlight the importance of including all compensation components. In the second paper (“Putable Bonds, Risk Shifting Problems, and Information Asymmetry”), I focus on the regular putable bonds and present an empirical examination of issuers’ motives to issue putable bonds. The findings suggest that risk-shifting incentives and information asymmetry are the main motives for the firms to issue putable bonds. I consider the simultaneity of the decisions on putable, covenants, and leverage, and further confirm the findings of the risk-shifting and information asymmetry hypothesis. The third paper (“Shareholder-Creditor Conflict and Hedging Policy: Evidence from Mergers between Lenders and Shareholders”) examines the effect of the shareholder-creditor conflict on the hedging policy. Using the mergers between the shareholder and creditor as an exogenous shock, I find that firms that experience mergers between the shareholder and creditor are more likely to hedge and hedge more in terms of the notional value.
In my first essay, I examine global integration in the market for asset management, as indicated by the correlation of mutual fund (MF) flows across domiciles. I observe a strong global factor in MF ...flows, and global integration is linked to a market’s business environment, safety from conflict, and political stability. In regional analysis, Europe represents an integrated market for asset management, led by Luxembourg, where asset managers face common flow risks across domiciles. The Asia-Pacific region displays no coherent patterns of correlations across domiciles. In my second essay, I study the evolution of contagion over the time and across conditions in the market for asset management by examining the time trend in cross-country mutual fund flow correlations during recent decades. Then, I investigate changes in cross-country flow correlations during and after the financial crisis of 2006-2008. I find that there was a peak in market contagion during the financial crisis period, and correlations decreased in following periods. In my third essay, I examine how international (MF) flows are largely uncorrelated with the United States’ (US) MF flows, although domicile MF flows are strongly associated with domicile MF returns and domicile MF returns are strongly associated with US MF returns. I refer to this puzzle as the intransitivity of international MF flows. I find that beside financial development of a domicile (measured by market capitalization), past domicile return, the predictable component of lagged US flows and the idiosyncratic component of lagged domicile returns are associated positively with subsequent domicile flow.
This dissertation includes two chapters on empirical asset pricing. In the first chapter, I study how data from different social media platforms may have different market implications. Using data ...from investing-related chat rooms, I find that social media group investing can help investors find high alpha stocks and are more informative than individual posts and comments in asynchronous investing forums. The second chapter examines various aspects of the sensitivity of the risk-neutral excess stock variance attempting to explain expected returns to reasonable alterations in the empirical design. The results reveal substantial time-series and cross-sectional variations in the predictive relation between risk-neutral variance and future stock returns.
This dissertation aims to determine the value of the equity of Campari, a leading company in the branded spirits industry. Among the set of valuation techniques presented, the FCFF version of the ...Discounted Cash Flow model resulted to be the most appropriate methodology to derive the price target for Campari. In addition, market multiples have been considered by focusing on forward P/E and forward EV/EBITDA. Furthermore, precedent transactions have been analysed in three different periods, highlighting the respective EV/EBITDA and EV/Sales. The resulting price target from the DCF is € 11.27 as of December 31st, 2022, which corresponds to a 10.9% upside potential compared to the closing price of € 10.16 as of 13 th December 2022. The buy recommendation is based on a solid growth and risk profile of the projected cash flows of the company. Given the challenging macroeconomic landscape, scenario analysis has been included to account for a slower recovery from the Ukraine crisis. In addition, sensitivity and Monte Carlo analyses have been incorporated to assess the elasticity of the result to changes in key inputs. The outcome suggests a wider price range between € 8.11 and € 15.63, which in 50.4% of the simulations corresponds to a buy recommendation. Lastly, the result and the main assumptions have been compared to an equity report issued by Bank of America.
I set up a disagreement model where traders not only have different interpretations of a public signal that conveys information of a stock, but are also uncertain about the information quality of ...others' interpretations. The model along with traders being ambiguity-averse predicts a positive relation between investor disagreement (ID) and expected stock return. Consistent with the model's prediction, I find that stocks in the highest ID decile outperform stocks in the lowest ID decile by 9.2 percent annually, adjusted for exposures to the market return as well as size, value, momentum, and liquidity factors. In addition, stocks with higher ID prior to earnings announcements earn significantly higher earnings announcement returns. Furthermore, investor disagreement also increases following firm-specific news events.
