Theses and Dissertations - Department of Economics, Finance & Legal Studies

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Browsing Theses and Dissertations - Department of Economics, Finance & Legal Studies by Subject "Economics, Finance"

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    Three essays in corporate finance
    (University of Alabama Libraries, 2010) Nasser, Tareque; Agrawal, Anup; University of Alabama Tuscaloosa
    This dissertation contains three distinct essays in the broad area of corporate finance. The first two essays examine the role of an independent director who is also a blockholder (IDB), a potent governance mechanism, on executive compensation, and corporate financial and investment policies, respectively. The last essay examines insider trading in takeover targets. The first essay examines three issues. First, we investigate the determinants of an IDB's presence in a firm. Second, we examine the relations between IDB presence and (1) the level and structure of CEO compensation, and (2) CEO turnover-performance sensitivity. Third, we analyze if IDB presence is related to firm valuation. Our findings suggest that the presence of an independent blockholder on the board promotes better incentives and monitoring of the CEO, and consequently leads to higher firm valuation. In the second essay, we examine how the presence of an IDB affects: (1) four key financial and investment policy choices of a firm: the levels of cash holdings, dividends, investments and financial leverage, and (2) firm risk. We also examine how the market values IDB presence and changes in various policy choices associated with IDB presence in a firm. We find that firms with IDBs have significantly lower levels of cash holdings, dividend yields, repurchases, and total payout, but higher levels of capital expenditures. We also find that firms with IDBs have lower risk. Overall, IDB presence appears to reduce agency problems between managers and shareholders. The third essay brings large-sample evidence on whether the level and pattern of profitable insider trading before takeover announcements is abnormal for a broad cross-section of targets of takeovers during modern times. We find an interesting and subtle pattern in the average pre-takeover trading behavior of target insiders. While insiders reduce both their purchases and sales below normal levels, their sales reduce more than purchases, leading to an increase in net purchases. This pattern of `passive' insider trading is confined to the six-month period before takeover announcement, holds for each insider group, for all measures of net purchases examined, and in certain sub-samples with less uncertainty about takeover completion.
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    Three essays in corporate finance
    (University of Alabama Libraries, 2009) Jeon, Jin Q; Ligon, James A.; University of Alabama Tuscaloosa
    This dissertation contains three essays in corporate finance. The first essay investigates the size and relative impact of termination fees utilized in merger agreements using a sample of 1,702 M&A deals involving U.S targets between 2001 and 2007. We find that the size of termination fees is widely distributed ranging from less than 1% to larger than 6%. The empirical results show that low or moderate fees do not eliminate post-bid competition, while large fees do. Also, a large fee significantly reduces the probability that deals with a high premium are consummated. In addition, the announcement returns are significantly lower for deals including termination fees larger than 5%. Overall, the paper provides new evidence that low- or moderate-size termination fees serve as efficient contractual devices, while large fees reflect target managers' self-interest and are less beneficial to shareholders wealth. Essay two focuses on a mechanism through which foreign investors affect corporate policy in emerging economies. We hypothesize that foreign investors who provide effective monitoring may affect corporate policy through pushing for a greater proportion of outsiders or by nominating their own representatives on the board of directors. Using the unique features of foreign ownership in Korea, we find that firms with an increase in foreign ownership are more likely to increase the fraction of outsiders and foreign directors on the board in the subsequent year. Increased board independence in response to a pressure from foreign investors results in a significant change in payout and investment policy, and an increase in firm performance. In the third essay, we study the effect of the co-managers in the syndicate on expected flotation costs using 1,775 completed and 164 withdrawn seasoned equity offerings (SEOs) from 1997 through 2005. The results show that highly reputable underwriters and commercial banks, when they serve as co-managers, significantly reduce expected flotation costs, while the effect of the number of co-managers is largely insignificant. Our results are consistent with a notion that highly reputable underwriters and commercial banks serving as co-managers enhance a certification role, reduce information asymmetries and, as a result, lower SEO flotation costs.
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    Three essays in finance
    (University of Alabama Libraries, 2011) Lu, Xing; Cook, Douglas O.; University of Alabama Tuscaloosa
    Essay one, Do Internet Board Messages Predict Stock Returns? An Analysis with Explicit and Intensive Board Postings, tries to discover whether postings on message boards predict future stock performance. While many other studies find significant predictive effects from message volume, they do not find significant predictive effects from message content, which is the most important and meaningful part of online messages. We improve sample selection, using a posting medium that allows for explicit buy/sell signals, focusing on firms with a high intensity of postings, and reducing posting noise by developing a credibility index. After controlling for factors which affect next day returns and incorporating credibility, we find that a bullishness index predicts next day stock returns at a 1% significance level. Essay two, Attention: A Better Way to Measure SEO Marketing Impact, differentiates itself from previous SEO marketing studies by using the first direct attention measure: the user search frequency index from Google Insight for Search (GIS). We find that as an attention proxy, GIS index has significant power in capturing impact around the time of the offering. A one point increase in the pre-issue GIS index change corresponds to a future reduction in the offer price discount by about 3%. In addition, as the only direct measure in SEO research, the GIS index differentiates itself from previous indirect measures by capturing some attention effects that are not captured by previous studies. All effects corresponding to the GIS index change are statistically significant and economically important. Essay three, Online Search Frequency, Information Asymmetry, and Market Liquidity, investigates online search frequency of Google users to explore how traders' response to information asymmetry would predict future market liquidity. The findings show that GIS daily index, as an effective measure of the level of information asymmetry, predicts the future liquidity level. This predictive power is significant at a 1% level. More importantly, the GIS indicators remain strong and significant after including traditional information asymmetry variables in all regressions. Last but not least, we find that the GIS index can capture investors' attention change and provide indications on future stock return.
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    Three essays in investments: financial risk tolerance and leveraged and inverse exchange traded funds
    (University of Alabama Libraries, 2010) Holzhauer, Hunter Matthew; McLeod, Robert W.; University of Alabama Tuscaloosa
    Since the recession of 2008, many financial advisors and investors have begun to take a closer look at the holdings within their respective portfolios. These holdings are a two-fold reflection of risk and return. First, they are a signal as to the amount of risk a client or investor has chosen to tolerate. Second, they are an indication as to the type of financial instruments or products the client or investor has chosen to seek their return objectives. This study addresses this balance between risk and return with papers addressing both sides of this scale. The first paper concentrates on developing a more valid and reliable financial risk tolerance (FRT) questionnaire. Specifically, we use factor analysis and find five factors for measuring FRT. Our results have obvious uses for financial planning, particularly portfolio allocation. The second and third paper address the effects of expected market volatility on a not well understood group of relatively new financial instruments called leveraged and inverse exchange traded funds (ETFs). The second paper specifically looks at the daily returns of these specific ETFs and finds that expected market volatility and the daily change in expected market volatility have significant effects on daily returns. The third paper examines long-term holding strategies for these specific ETFs and finds that expected market volatility has a significant effect on long-term returns. These results suggest that volatility indexes may be used to devise trading rules for these specific ETFs. In the end, the results of these three papers accomplished the goal of this research as a whole, which was to better equip advisors and investors with the tools and information needed to balance the risk and return within their respective portfolios.
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    Three essays on momentum
    (University of Alabama Libraries, 2010) Wang, Jun; Brooks, Robert Edwin; University of Alabama Tuscaloosa
    Essay 1, Growth/Value, Market-Cap, and Momentum, examines the profitability of style momentum strategies on portfolios based on firm growth/value characteristics and market capitalization. We use monthly total returns of nine S&P style indices to avoid concerns about firm size, liquidity, credit risk, short-sale constraints, and transaction costs. We find that historically buying a past best performing style index and short-selling a past worst performing style index generates economically and statistically significant profit of 0.8% per month over the period June 1995 to March 2009. This profitability remains economically plausible after adjusting for systematic risk, short-sale costs, and transaction costs. Investors may actually implement style momentum strategies on exchange traded funds linked to the S&P style indices. Essay 2, Sector Momentum, examines monthly returns of nine Select Sector SPDRs and finds historically buying past outperforming sectors and selling past underperforming sectors produces economically and statistically significant profits. Investors may be able to not only benefit from SPDRs' low fees, tax efficiency, and trading flexibility, but also exploit SPDRs as asset allocation tools to earn excess returns on sector momentum. For robustness checks, I test sector momentum investing strategies on CRSP listed individual stocks between January 1963 and December 2008 using Global Industry Classifications Standard (GICS) and also find statistically significant payoffs. Essay 3, Momentum Strategies on Global ETFs, examines the price momentum on 15 well-diversified iShares MSCI Country Index ETFs from April 1996 to December 2006. I find statistically and economically significant profits for some momentum strategies: long past winners and short past losers. The results are robust to trading costs and excessive risks.
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    Three essays on the effects of risk and regulation on the price of term life insurance
    (University of Alabama Libraries, 2010) Cooper, Patrick Ryan; Ligon, James A.; Elder, Harold W.; University of Alabama Tuscaloosa
    While life insurers are generally free to set prices on term life insurance contracts, they face three constraints in doing so. Two of these constraints, insurance premium taxes and insurance guaranty funds, are imposed by state governments, while the third, the insolvency risk premium of insurance contracts issued by a specific insurer, is imposed directly by the market. The first two essays estimate the effects of the two government-imposed constraints on the price of term life insurance. In essay one, we look at how guaranty funds affect the price of term life insurance. Guaranty funds, which exist in every state, reduce the cost of insurer insolvency to policyholders by paying out death benefits up to a specified amount, usually $300,000, on policies written by insurers that have become insolvent. We show theoretically, using an expected value model, and empirically, using data from the California term life insurance market, that the price per thousand dollars of coverage is significantly lower for policies with a face value above the amount guaranteed by the state guaranty fund. In essay two, we estimate the effects of state insurance premium taxes on the price of term life insurance. In estimating the effects of state-specific premium taxes on the price of term life insurance, we linearly bifurcate each state's premium tax into a domestic premium tax, which is paid by all life insurance companies, regardless of domicile, and a retaliatory tax, which is paid only by an insurer whose state of domicile has a premium tax greater than that of the state in which the policy is written. We find that a one percent increase in both the domestic premium tax and the retaliatory tax increase the price of term life insurance by less than one percent. Finally, in the third essay, we estimate the effect of an insurer's insolvency risk, as measured by A.M. Best Financial Strength Ratings, on the price of a term life insurance contract issued by that insurer. Insurance contracts sold by an insurer with a relatively lower rating should sell at a discount to policies written by firms with a higher rating. We find strong evidence that insurers with a relatively higher A.M. Best rating actually charge lower prices.