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

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Essays in real estate
(University of Alabama Libraries, 2013) Stelk, Steven; Zumpano, Leonard V.; University of Alabama Tuscaloosa
This study exploits the recent financial crises as a unique natural experiment to examine relationships in residential real estate brokerage and real estate investment through three essays. The first essay examines the impact of agency disclosure on residential restate transactions in the post-financial crises period and extends the literature with three key findings. First, the overall proportion of buyers that report receipt of agency disclosure has not improved since previous studies were completed. Second, there is no evidence that buyers who do not report receipt of agency disclosure pay different prices for homes than buyers who do report receiving agency disclosure. Finally, there is evidence that the timing of agency disclosure matters. Among buyers that do receive agency disclosure, those receiving disclosure at a time other than the first contact with a broker are associated with 3.2% higher home prices. The results demonstrate the need for continued improvement in mandatory disclosure statutes. The second essay investigates the real estate brokerage market's impact on home prices in both a seller's market (2006) and a buyer's market (2009). In both years, homes sold with brokerage assistance realized higher prices when compared to homes sold without the aid of a broker, even after controlling for selection bias in the seller's choice to use a broker. This is the first study using a national dataset that finds evidence of price segmentation in the residential real estate market. The findings may be the result of the extreme market conditions housing market participants faced in 2006 and 2009. The third essay examines the impact of REITs on the Value-at-Risk (VaR) of a mixed asset portfolio surrounding the financial crises using a new, more accurate method of estimating VaR, conditional autoregressive value at risk (CAViaR). The more accurate VaR estimates show that adding REITs to the portfolio has no significant impact on VaR until after the financial crises begins in 2006. After 2006, adding REITs to a portfolio of stocks and bonds dramatically increases VaR. The results have significant implications for portfolio selection.
Essays in real estate market issues
(University of Alabama Libraries, 2012) Richardson, Heather Renea; Zumpano, Leonard V.; University of Alabama Tuscaloosa
This dissertation consists of three separate essays in the area of real estate. The first essay examines the continuing evolution of the Internet and the resulting effects on the efficiency of buyer search. The second essay evaluates the menu of alternatives for sellers of commercial real estate who encounter detrimental conditions. Finally, the third essay examines how publicly listed banks perform as sellers of commercial real estate as compared to non-bank sellers. The first essay includes market conditions indicative of both a buyer's market and a seller's market. The results indicate that as Internet usage increased search duration increased, whether a buyer's or seller's market. This research finds that the Internet increased buyer search intensity only when market conditions are more favorable to buyers. The second essay considers short sales, REO sales, and auction sales. Properties sold by each method are found to be significantly discounted relative to properties that are sold under normal conditions. REOs have the greatest discounts, followed by short sales, while properties sold at auction experience the smallest discount. Property characteristics, geographic contagion, market timing, and statutory rights of redemption are each found to have an impact on the relative pricing of properties sold under detrimental conditions, depending on the procedure. The third essay examines how publicly listed banks perform when compared to non-bank sellers. The non-bank sellers include non-institutional sellers (individuals and developers), corporate sellers, REITs, and financial institutions (equity funds, insurance companies, investment managers, and pension funds). The results indicate that bank sellers do tend to sell properties at a discount. Abnormal returns around the transaction date are estimated using a generated benchmark Bank companion Index and are found to be positive and significant. Determinants of these cumulative abnormal returns, assets, return on assets, Tobin's Q, coverage ratio, debt reduction, preferred dividends, and invested capital are considered. The return on assets and debt reduction are found to positively affect abnormal returns, whereas invested capital is negatively related to invested capital.
Essays on behavioral corporate finance
(University of Alabama Libraries, 2017) Shen, Mi; Cicero, David C.; Mobbs, Houston Shawn; University of Alabama Tuscaloosa
This dissertation examines the behavioral traits of business executives that lead to financial misconduct. The first essay investigates whether executives act more honestly when ethical considerations are made to stand out in an obvious way. In behavioral experiments, individuals are less likely to cheat when the saliency of dishonesty is increased (Mazar et al. 2008; Gino et al. 2009). We test this hypothesis in a real world setting by treating news about high-profile political scandals as shocks to the salience of unethical/illegal behavior. Analyzing corporate insiders’ stock trading activity, we find evidence of a reduction in inappropriate behavior during these periods. Insiders’ stock sales are less profitable and they are less likely to sell stock ahead of large price declines, suggesting less illegal insider trading. The results are concentrated in months with high levels of local media attention to political scandals, supporting an interpretation that the salience of these events affects insiders’ behavior. The relation is also stronger when an executives’ firm is aligned politically with the accused politician, suggesting that a scandal is more salient to “in-group” executives. However, the behavioral changes appear to be largely transitory and evidence of suspect trading resumes in subsequent years. The second essay examines the effect of envy on executive misbehavior. We provide evidence that envy can lead to executive misbehavior in the form of insider trading. Insiders at underperforming firms headquartered where more other firms are performing well demonstrate greater evidence of informed insider trading. Their stock trades generate higher abnormal returns, and they are more likely to sell stock ahead of a large price decline. We find similar evidence of profitable insider sales when CEOs suffer large pay gaps from their local peers. Envy motivated trading is more apparent in locations where household give less to charities, which may indicate higher levels of greed on average.
Essays on CEO behavior
(University of Alabama Libraries, 2015) Mills, Jackson; McLeod, Robert W.; University of Alabama Tuscaloosa
This dissertation is composed of two essays that examine the feedback between firm financial characteristics and CEO behavioral tendencies. The first essay examines the relationship between CEOs’ facial width-to-height ratios (fWHR) and firms’ financial policies. Greater facial width is considered to be a masculine physical trait and has been linked to increased aggressive behavior and greater risk tolerance. I find that high-fWHR CEOs pursue more aggressive financial policies, including increased leverage and reduced cash holdings. Additionally, I find that high-fWHR CEOs tend to maintain smaller ownership shares of their firms, suggesting that these CEOs place relatively lower importance on signaling alignment with shareholders. I also show that acquisition attempts led by high-fWHR CEOs are more likely to be unsuccessful. Despite that these managerial characteristics in high-fWHR CEOs are not offset by greater profitability, I find that high-fWHR CEOs do not face a greater risk of forced turnover. In the second essay, I examine CEOs’ option-exercise decisions. The retention of deep in-the-money stock options has been ascribed to managers’ overconfidence in their ability to increase firm value. I find that this behavior is predicted by non-private firm financial information and macroeconomic conditions. Specifically, managers are more likely to retain deep in-the-money stock options when their firms are more profitable, less financially constrained, and have greater growth opportunities. This behavior is also more frequently exhibited during periods of macroeconomic expansion. Given its apparent reactionary nature, this behavior seems to be a reflection of managers’ optimism regarding the near-term financial prospects of their firms and is not necessarily attributable to managerial overconfidence.
Essays on corporate governance and executive compensation
(University of Alabama Libraries, 2016) Washington, Patrick Bernard; Underwood, Shane E.; University of Alabama Tuscaloosa
This dissertation is composed of three essays that study the interconnections between blockholders and CEO power, and the link between deferred compensation (inside debt) and financial performance/firm behavior. In the first chapter, I consider agency theory’s prediction that a large shareholder, ”blockholder,” can serve as an effective governance mechanism when monitoring man- agers by reducing CEO dominance. However, not all blockholders are created equally. Inside blockholders with large equity stakes may be subject to CEO influence. Outside blockholders may not fear the same career concerns. Using a novel approach, I sepa- rate blockholders into insiders (officers & directors) and outsiders when considering their relationship to CEO power, which is proxied by the CEO Pay Slice (CPS). However, separating blockholders into outside and officer specifications reveals that director block- holders reduce CEO power. Economic theory suggests that firms with multiple classes of shares have weak governance structures. A significant difference in CEO dominance inside dual class share firms versus single class share firms has been documented. This paper expounds on previous research and shed’s light on the effect of insiders’ differential shareholder rights in dual class share firms. Evidence is provided that shows as insiders’ percentage of voting rights increase then CEO power (CPS) decreases. Also, the results reveal that as insiders’ percentage of cash flow rights increase then CEO power (CPS) increases. In the second chapter, I study recent literature’s documentation that inside debt is widely used in executive compensation contracts. Prior research has only focused on the CEO’s level of inside debt. However, the inner workings of the top executive team, and their importance for firm performance are difficult to observe and measure. In this essay, I aim to contribute to the subject by introducing new measures pertaining to the rela- tionship between the CEO and the other members of the top executive team, as well as studying the relation between these measures and the value, performance, and behavior of public firms. My novel measure is the Slice of CEO Inside Debt (SCID) – the frac- tion of the aggregate deferred compensation (inside debt) of the top-five executive team captured by the CEO. The effects of total deferred compensation account balances, firm contributions, executive contributions, and earnings on deferred compensation accounts are examined with respect to SCID. This research provides evidence of increased CEO tenure (entrenchment) in relation to the earnings measure of SCID, reduced spending on research and development in relation to the earnings measure of SCID, increased spend- ing on capital expenditures in relation to the executive contributions measure of SCID, and a lower probability of bankruptcy in relation to the executive contributions measure of SCID. Also, this paper shows that as the CEO’s slice of deferred compensation from firm contributions and executive contributions increases then firm liquidity, i.e. working capital, decreases. In the final chapter, I consider prior research that has shown firms with CEOs who have less power take less risk. Thus, theory suggests that reducing CEO power through the use of deferred compensation, ”inside debt,” should motivate executives to become more risk averse. This essay investigates the relationship between the Slice of CEO Inside- Debt (SCID) — the fraction of the aggregate deferred compensation (inside debt) of the top-five executive team captured by the CEO — and CEO power (CPS–CEO Pay Slice) and corporate social responsibility (CSR). The effects of firm contributions, executive contributions, and earnings on deferred compensation accounts are examined with respect to SCID in relation to CPS and CSR. This research provides evidence of increased CEO power by showing that firms with CEOs who contribute more money to their deferred compensation accounts relative to the total amount deferred by the top five executives, including the CEO, have CEOs with greater power in the following year. Additionally, this essay studies firms use of inside debt and its effect on corporate social responsibility. Empirical evidence is provided that firms with CEOs who experience increased earnings on their deferred compensation accounts relative to the account earnings of top five executives are positively correlated with being more socially responsible.
Essays on corporate share repurchase and household portfolio choices
(University of Alabama Libraries, 2017) Zhang, Weiwei; Cook, Douglas O.; University of Alabama Tuscaloosa
This dissertation consists of two empirical essays and one theoretical essay. In the first essay, I investigate how sensitivity of CEO’s pay-for-performance compensation to stock prices affects firm’s payout and investment policies. On the company’s payout side, we find that higher delta CEOs tend to execute more share buybacks and pay fewer cash dividends. The evidence supports the notion that stock price sensitive executives particularly favor repurchases as the payout form. On the investment side, we find that higher delta CEOs allocate more money towards share buybacks, direct fewer investment resources to capital expenditures, and cut back employment. Additionally, repurchasing firms experience deterioration in operating performance subsequently following the repurchases. Our result suggests that the sensitivity of executives’ compensation to stock price induces CEOs to favor short-term performance over long-term performance. In the second essay, I use an ex-ante and forward-looking stock mispricing measure to examine whether and how equity misvaluation affects corporate stock repurchase activities. In particular, we obtain the equity mispricing measure P/V by normalizing prevailing stock price with the firm’s intrinsic value based on Residual Income Model (RIM). In particular, I find that undervalued firms are more likely to conduct buybacks and tend to repurchase more in terms of the percentage of market value of equity and dollar volume of the repurchase. These evidence suggest that equity undervaluation serves as a significant determinant for companies to undertake actual stock repurchase. The primary goal of the third essay is to explain family investment decisions under the assumptions of household member’s preferences and efficient risk sharing among them based on the collective household model. By examining the absolute (relative) risk aversions of household welfare function, we demonstrate how household’s portfolio allocation in stocks changes with family wealth. This paper examines two types of preference heterogeneity between spouses: parameter heterogeneity and functional form heterogeneity. This study offers an alternative explanation of household portfolio choice corresponding with the observation that wealthier households tend to hold greater share of family wealth in risky assets.
Essays on public pension reform
(University of Alabama Libraries, 2016) Hanby, Charles Martin; McLeod, Robert W.; University of Alabama Tuscaloosa
In my first essay, we examine the financial impact of states’ legislative response regarding pension reforms since 2008 recession. Since 2001 the combined funded ratio of the 115 state level public systems in our data set has fallen from being fully funded in 2001 to roughly 72% as of 2013. In absolute dollars this translates to a shortfall of almost $1 trillion. We found that 49 of 50 states passed pension reform legislation during this period; however, the impact of these reforms on funded ratios has been minimal due to the inability of most states to apply reforms to existing employees. In short, we don’t expect funded ratios to improve without significant increases in plan contributions. This result is likely due to the issue mentioned above regarding existing employees, amortization elections previously made by plans and unrealistic investment return assumptions. In my second essay, we use asset allocations and investment returns from the same data set to address the issue of pension plans taking on additional investment risk for the purpose of reducing annual plan contributions. We examine changes in portfolio allocations over a fourteen-year period paying special attention to responses to market downturns. We then examine investment returns on an actual and risk-adjusted basis. We find no evidence of moral hazard related to the asset allocations of public pension plans. In fact, we find that public pension plans outperformed the markets on an actual and risk-adjusted basis in many cases. We confirmed our findings described above using several models including the Capital Asset Pricing Model, Fama French three-factor and five-factor models and the Carhart four-factor model. We regress our equal-weighted and value-weighted pension investment return data against each of the models. All of our regressions produced positive and significant alphas. We then perform panel fixed effects regression on the same set of models. We find positive and significant alphas using all five models confirming the previous results. Finally, we employ a bootstrapping procedure to confirm the alphas in our time series regressions were positive and significant. We find that state level pension plans do generate positive alphas.
Essays on unusual tax strategies
(University of Alabama Libraries, 2017) Stover, Joseph Edward; Cook, Douglas O.; University of Alabama Tuscaloosa
In the first essay, we examine corporate inversions, which occur when companies leave the United States to save on their taxes. We gather a unique sample of 80 corporate inversion announcements to explore what drives the decision to invert. We find no evidence that the firms that choose to invert have abnormally high tax burdens, instead we find evidence of ``tax aggressive'' behavior even before these companies invert. We also find evidence that inversions are more likely in highly competitive industries, suggesting that competitive pressures push companies towards inversions. Furthermore, we find evidence that certain board characteristics affect the probability that a company will invert. Finally, we provide evidence that inverters can be harmed by political speech aimed at them. In the second essay, we examine companies that fail to utilize the tax benefits of debt. In particular, we look at how the stock market evaluates these companies. We find that despite the fact that these companies are ignoring the tax benefits of debt they earn a significant premium in the market. We also find that at least some of this excess return comes from periods with high interest rates, when the cost of debt is higher.
Executive political preferences and corporate decisions and outcomes
(University of Alabama Libraries, 2015) Rich, Tara; Agrawal, Anup; University of Alabama Tuscaloosa
Corporate decisions and policies made by executives have real effects on the financial valuation of firms. Therefore, the behavior of executives, including underlying causes and subsequent implications, is important in the study of finance. This dissertation investigates executive behavior by examining how the political preferences of executives affect their corporate decisions and the subsequent outcomes. The first essay focuses on the impact of executive political preferences on mergers. Using a rare and hand-collected dataset of executive political donations and CEO retention following mergers, I investigate how shared political preferences between executives of merging firms affect the probability of a merger and subsequent merger outcomes. The second essay focuses on how CEO political preferences affect firm policies and market distribution. In this paper, I use the dataset of executive political donations to examine if Republican-led firms have less risky policies, such as less use of earnings management and lower likelihood of restating earnings. I also test if these less risky policies by Republican managers result in less risky stock return distributions for their firms.
Explorations into market timing factors
(University of Alabama Libraries, 2014) Handy, Jonathan Firpo; Underwood, Shane E.; University of Alabama Tuscaloosa
This dissertation consists of three essays on factors that influence how managers choose when to pursue important company investment decisions and the quality of those investment decisions. The dissertation research seeks to more fully develop researchers' understanding of whether stock prices influence when companies decide to repurchase company stock and when they decide to sell additional stock and whether or not internal behavioral biases and pressures from large external investors further influences these decisions. My results further strengthen the notion that behavioral finance needs a stronger presence within the corporate finance realm. The first essay investigates how the presence of large external activist hedge fund investors distorts corporate stock repurchase policy. I show that prior to being targeted companies repurchase stock less often than their peers and that the converse is true after these firms are targeted by activist hedge funds. Moreover, I find that this stock repurchase increase leads to repurchases that are seemingly less correlated with market timing attempts and are of worse quality than their non-targeted peers. The second essay investigates how managerial overconfidence affects how corporate managers time their repurchases with market undervaluation periods. I find that overconfidence seemingly elicits an increased propensity to repurchase stock and that this behavioral bias can account for the popularly held notion that managers repurchase poorly. An additional analysis of market liquidity surrounding the repurchase suggests that investors believe moderately confident repurchases are informed trades aimed at benefitting from a temporarily low stock price while overconfident repurchases are not. The third essay investigates how managerial overconfidence affects seasoned equity offerings and how likely management is to issue such an offering alongside periods of temporary stock price overvaluation. I find that overconfident managers are generally no less likely to offer equity than their moderately confident peers; however, as stock returns increase moderately confident managers are significantly more likely to pursue equity offerings. Additionally, an analysis of short-term cumulative abnormal returns and long-term buy-and-hold abnormal returns provides evidence that overconfident equity offerings are less likely to be market timing attempts when compared to moderately confident attempts.
Investigating executive traits and corporate actions
(University of Alabama Libraries, 2019) Zhang, Wenqiao; Kong, Lei; Mobbs, Shawn; University of Alabama Tuscaloosa
This dissertation includes three essays on executive traits and various corporate consequences. In the first essay, we document a unique type of CEOs who are not always selfish, that is, altruistic CEOs. Specifically, we find evidence that when faced with weak corporate governance, altruistic CEOs are less likely to initiate value-destroying acquisitions, where we construct altruistic CEOs using their personal donation records to charities. Furthermore, this difference between altruistic CEOs and their peers are stronger when corporate governance is weaker, indicating that not all CEOs are always self-interested. In addition to corporate takeovers, we show that altruistic CEOs are less likely to engage in corporate wrongful activities, resulting in fewer lawsuits against the firm, fewer earnings manipulations, and lower insider trading profits. We contribute to the standard agency theory by showing that managers are not universally self-interested and identify a possible measure to spot more selfless managers by using charitable donations. In the second essay, we find that firms managed by CEOs who make regular charitable donations have significantly higher CSR performance than those managed by CEOs who occasionally donate or never donate. To identify causation, we examine changes in firms’ CSR performance around exogenous CEO turnover events with a difference-in-difference approach. We find that when a non-routine-donor CEO or non-donor CEO is replaced by a routine donor CEO, the firm’s CSR performance improves. Also, using natural disasters as quasi-natural experiments that increase public awareness about CSR, we find firms managed by routine donor CEOs increase their firm’s CSR performance more than firms managed by non-routine-donor CEOs after the shocks. Our results are consistent with behavioral consistency theory which predicts that a CEO’s personal socially responsible behavior can predict his firm’s socially responsible engagement. Overall, we provide important new evidence on why firms engage in CSR and identify a new CEO characteristic that can predict such engagements. In the third essay, we investigate the relationship between the CEO and the CFO focusing on one of the visible cultural attributes, age. Substantial age dissimilarity between the two, giving rise to cognitive conflicts, increases the difficulty of communications and may destroy firm value. We measure this age dissimilarity using the age gap between the CEO and the CFO to investigate its correlation with the firm’s financial performance. We find evidence showing that firm performance is negatively correlated with this age gap. As the high-tech industries require more efficient and timely communications, the age gap effects are stronger for those firms. Further, when human capital is of more importance, that is, for younger firms, the age gap effects are also stronger. As an alternative to age-based analysis, we also analyze the effects of a generational gap between the CEO and the CFO. We find that firm value tends to be lower when the generational gap exists between the two.
Issues in IPO valuations: asymmetric information and market regulation
(University of Alabama Libraries, 2014) Rhodes, Heather Nicole; Ligon, James A.; University of Alabama Tuscaloosa
This dissertation focuses on the effect of regulation and asymmetric information problems in the market for initial public offerings (IPOs). It consists of three essays that evaluate different aspects of the impact of regulation and asymmetric information problems on IPO valuations and pricing. The first essay retests the signaling and agency theories with a matched-sample of IPOs prior to and following the passage of the Sarbanes-Oxley Act of 2002 (SOX). Because the wealth effect could affect the results of these tests, it is also evaluated. The study is motivated by the potential impact of SOX-related governance and reporting requirements on the relative importance of adverse selection and moral hazard problems, with which the signaling and agency theories are respectively concerned, in the market for IPOs. Additionally, SOX may have affected the types of firms going public and ultimately the relative importance of adverse selection and moral hazard. Results on both the pre- and post-SOX samples are consistent with the signaling theory and evidence of a wealth effect exists in both eras, although it is more significant post-SOX. However, in contrast to results of studies conducted prior to SOX, both the pre- and post-SOX results give little credence to the agency theory, suggesting that SOX has not impacted investors' concerns regarding moral hazard. Rather, the difference between the pre-SOX results and the results of other studies conducted prior to SOX suggests that SOX appeared to reduce moral hazard concerns only through its effect on the self-selection of firms going public. The second essay utilizes a matched sample of IPOs prior to the passage of SOX and those issued after the passage of the Act to examine the role of the board structure provisions of the Act on firm value as well as the Act's general valuation consequences. We provide evidence that SOX has negatively impacted the IPO market by suppressing the number of yearly issuances, particularly deterring small issuers from entering public equity markets, and imposing binding constraints on board structure through the new exchange listing requirements. We document not only that firms going public post-SOX are much different than those going public pre-SOX, but also in matched sample comparisons, the Act does not appear to provide any valuation benefit. In particular, compliance with the board structure provisions provides no benefit and a post-SOX dummy is negative for some valuation measures. SOX thus appears to have imposed costs that prohibit many small firms from issuing IPOs, without a corresponding benefit for those that do issue. The third essay analyzes the relationship between the supply of institutional investor capital and IPO pricing. It is motivated by the recent literature documenting the importance of institutional investment to the cost of raising equity capital and the tendency of professional money managers to mimic one another's trades. I propose that institutional investment in an industry may influence the pricing of initial public offerings through the effects of competition on the pricing process, particularly by affecting the Benveniste and Spindt (1989) partial adjustment process. I hypothesize that the level and concentration in institutional investment in an industry in which an issuer operates serves as a proxy for the competitiveness of the supply of capital in that industry, and that relatively higher levels of competition reduce the need for partial adjustment. Additionally, in more competitive markets, offer price updates should be larger and initial returns should be relatively lower. The results suggest support for these hypotheses. In more competitive markets, there is less partial adjustment, offer price revisions are larger and initial returns are lower. The results on partial adjustment and offer price revisions are robust to controlling for endogeneity issues, while the results on initial returns are substantially weaker once endogeneity is addressed.
Three essays in agency related issues
(University of Alabama Libraries, 2016) Yan, Xinyan; Mobbs, Houston Shawn; University of Alabama Tuscaloosa
This dissertation explores three types of agency related issues. The first essay is related to the CEO-shareholder relation. We examine how the legal background of affects the corporate policy and shareholder wealth. We empirically analyze whether law CEOs manage their firm differently. We find that law CEOs take less risk and perform better in the short-run. Law CEOs are especially valuable to firms involved in litigation. Specifically, when firms experience litigation, those with law CEOs experience less volatile market returns, maintain better operating performance and face lower litigation settlement costs. However, our evidence also suggests law CEOs tend to be more myopic. Firms with law CEOs invest less in R&D and have lower R&D growth rates. The second essay examine the relationship between acquirers and M&A advisors. Using a sample of serial takeover sequences, we examine the cost-benefit tradeoffs associated with an acquirer’s willingness of selecting suitable advisors for each deal during a sequence of acquisitions. We find that acquirers are willing to do so experience more favorable announcement reactions from shareholders, pay lower acquisition premiums and advisory fees, and complete transactions faster. We also use propensity score matching to address possible endogeneity concerns and find our results are robust. These findings suggest that acquirers benefit from selecting the right advisor for each acquisition rather than staying with one advisor throughout the sequence of acquisitions. The third essay focus on buyer-agent relationship. This essay studies the role of buyer brokers in the home-buying process under different market conditions by examining the effects of brokerage representation on home prices and search duration. Using data from 2006 and 2012 NAR annual surveys, we find that buyer brokers have no effect on prices in a seller’s market while they do have a statistically significant positive effect in a buyer’s market. We find that buyer brokers do not affect search duration in either a buyer’s or seller’s market. To address the endogeneity problem, we use the propensity score matching methodology, which find our results are robust. We also find that Internet search frequency has a significant effect on purchases prices and search duration.
Three essays in behavioral finance
(University of Alabama Libraries, 2018) Young, Michael; Agrawal, Anup; Wang, Albert Yan; University of Alabama Tuscaloosa
Over the last two decades, there has been a significant increase in research related to behavioral finance. As Barberis and Thaler (2002) point out, there are two main aspect of behavioral finance: limits to arbitrage and the effects of psychology. My dissertation will focus on the second aspect, the effects of psychology on individual investor behavior. The first essay examines an important question in this behavioral finance literature: changes in aggregate risk aversion. I use changes in the level of terrorism in the United States as a shock to the aggregate mood of American investors, and examine changes in flows to mutual funds as a proxy for investor risk preferences. After examining investors vulnerable to changes in mood after attacks, and ruling out any possible effect due to changes in expect risk, and changes to expected returns, the first essay concludes that mood driven risk aversion is the likely cause of the change in behavior. In the second essay, we use the insights gained from Essay 1 regarding the change in behavior of U.S. investors following an increase in terrorist attacks. Using household level of equity market participation and individual trading data the second essay examines the array of decisions investors make. The second essay finds that households participate less in equity markets, trade less, but purchase more local stocks in response to terrorist attacks. Additionally, this change in behavior is especially apparent in households where the designated head is a male. Finally, in the third essay we turn away from terrorism, and examine the effects that local NFL team performance on equity market participation. Examining the most popular spectator sport in the U.S. the third essay shows that poor performance by local NFL teams correlates with fewer households in that state owning equity. While previous studies argue that sentiment is the driver of sports related behavior, the third essay find that gambling losses may also play a role in the drop in equity market participation following seasons with a low number of wins. Taken together, the dissertation demonstrates the importance of examining external shocks and the effect they have on the behavior of investors. From terrorism to something as seemingly benign as the NFL, the dissertation adds to the behavior finance literature by identifying new shocks that effect the investing behavior of individuals.
Three essays in corporate finance
(University of Alabama Libraries, 2015) Adhikari, Binay Kumar; Agrawal, Anup; University of Alabama Tuscaloosa
This dissertation consists of three essays in corporate finance. There are five chapters. In the first essay, we find that local gambling preferences have economically meaningful effects on corporate innovation. Using a county's Catholics-to-Protestants ratio as a proxy for local gambling preferences, we show that firms headquartered in areas with greater tolerance for gambling tend to be more innovative, i.e. they spend more on R&D, and obtain more and better quality patents. These results are supported by several robustness checks, tests to mitigate identification concerns, and analyses of several secondary implications. Investment in innovation makes a stock more lottery-like, a feature desired by individuals with a taste for gambling. Gambling preferences of both local investors and managers appear to influence firms' innovative endeavors and facilitate transforming their industry growth opportunities into firm value. In the second essay, we find robust evidence that banks headquartered in more religious areas take less risk and remain less vulnerable to financial crises. To reduce risk, these banks grow their assets more slowly, hold safer assets, rely less on non-traditional banking, and provide less incentives to their executives to increase risks. Local religiosity has a more pronounced influence on risks among banks for which local investors and managers are more important. But these banks command lower market valuations during normal times. Overall, this paper provides the first empirical evidence of the importance of human behavior in bank risk-taking. In the third essay, I examine the influence of sell-side financial analysts on corporate social responsibility (CSR), and find that firms with greater analyst coverage tend to be less socially responsible. To establish causality, I employ a difference-in-differences (DiD) technique, using brokerage closures and mergers as exogenous shocks to analyst coverage, as well as an instrumental variables approach. Both identification strategies suggest that analyst coverage has a negative causal effect on CSR. My findings are consistent with the view that spending on CSR is a manifestation of agency problem, and that financial analysts exert pressure on managers to cut back such discretionary spending.
Three essays in corporate finance
(University of Alabama Libraries, 2016) Lim, Yuree; Agrawal, Anup; University of Alabama Tuscaloosa
The dissertation contains three essays in corporate finance. The first essay examines to what extent shareholder gain from activism is the result of wealth transfer from employees of a firm targeted by activism. My baseline results show that target firms experience underfunding in defined benefit employee pension plans after acts of activism. My evidence suggests that the underlying mechanism of this wealth transfer is the agency conflicts between CEO-shareholder alliance and CEO-worker alliance. My identification strategy is to examine possible alternative explanations. My various tests reject alternative hypothesis such as sample attrition, management’s voluntary reforms, activists stock-picking skills, and the changes due to mean reversion. I also find that target firms experience funding shortfalls after activism. It appears that the underlying mechanism is the degree of managers’ entrenchment. Entrenched managers tend to create a worker-management alliance using employee stock ownership. Consistent with this hypothesis, target firms with employee stock ownership in the own company are less likely to experience funding shortfall. In the second essay, analyzing texts in Schedule 13D filings, I address important questions regarding shareholder activism: which forms of activism increases firm value and under what circumstances? I show that investors respond more positively to activist shareholders who use soft activism, communicating with their target firms’ managers or other shareholders rather than a harder approach. Overall, I provide empirical evidence that soft shareholder activism is value-enhancing. In the third essay, I show that a local culture of altruism influences corporate social responsibility (CSR). I measure the level of local altruism by the amount of contributions to charitable, educational, religious organizations, and other cash gifts. I find evidence of a positive relation between local altruism and CSR scores of firms headquartered in a US county. I also find that increased CSR concerns of firms headquartered near altruistic communities have a negative impact on stock returns. Overall, my empirical evidence shows that local culture affects firms’ CSR polices and investors who invest in companies located in altruistic communities react more to the increase in concerns than increase in strengths of CSR.
Three essays in corporate finance
(University of Alabama Libraries, 2017) Choi, Daewoung; Mobbs, Houston Shawn; University of Alabama Tuscaloosa
My dissertation focuses on three essays. The first essay studies the effect of the 2006 compensation disclosure rules on the market for CEOs by providing additional information about CEOs’ marketability. Using unique hand-collected data on compensation peers, we find CEOs who are more frequently cited as compensation peers by other firms are more likely to leave their firms or to receive compensation increases, especially in the equity-based component of total pay. The second essay studies the dynamics of compensation peers by identifying two groups of firms: 1) Those who adjust peer groups more frequently (Active firms), and 2) Those who adjust peer groups less frequently (Non-Active firms). I find while Active firms benchmark their CEO’s pay against peer pay over time, Non-Active firms do not use their compensation peer groups for benchmarking purpose. I also find that Active firms adjust their peers both to reward CEOs for good performance, and to penalize for bad performance. On the other hand, Non-active firms adjust their peer groups only to reward CEOs. The third essay examines the role of investor relations function in the top management team. We provide evidence that firms incorporating the investor-relation function in their top management teams are more likely to have greater analyst coverage, lower analyst forecast dispersion, and to more frequently beat analysts’ estimates. These firms also exhibit lower earnings management, which suggests that firms incorporating investor relations function in their top management team are less likely to manage earnings, but instead manage analyst expectations.
Three essays in corporate finance
(University of Alabama Libraries, 2012) Zeng, Hongchao; Cook, Douglas O.; University of Alabama Tuscaloosa
This dissertation contains three essays in corporate finance. In the first essay, using the presence of business combination (BC) laws to proxy for the monitoring strength of the takeover market, we examine how an active takeover market affects the level and valuation of corporate cash holdings. After accounting for potential endogeneity of state incorporation, we find that firms incorporated in states without BC laws hold significantly more cash than those incorporated in states with BC laws. We also find that the value of cash holdings used by firms to defend themselves against unwanted takeovers in the presence of an active takeover market is not discounted by investors. Our findings suggest a substitution effect between legal antitakeover protection and firms' use of cash protection. However, there is no evidence that these cash holdings lead to value destruction. Firms may use corporate payouts to signal internal governance quality and avoid a market discount placed on cash holdings. In the second essay, using the Herfindahl-Hirschman Index (HHI), the industry price-cost margin, the number of firms within an industry, and the level of import penetration to gauge the intensity of product market competition, we find that the speed of capital structure adjustment for firms in competitive industries is significantly faster than for firms in non-competitive industries. Further analysis reveals that this effect is driven solely by the capital structure movements of over-levered firms. While over-levered firms in competitive industries face higher levels of investment needs relative to those in non-competitive industries, they are significantly less likely to use debt financing and to deliberately deviate from target. In the third essay, we find that cash has a negative impact on the future market share growth of the old firms, evidence that can better explain the unwillingness of such firms to hold precautionary cash as they face increasingly more volatile cash flows in an imperfect capital market. Furthermore, we show that the relational strength between cash and product market performance evolves in a way that reflects a changing composition of manufacturing firms which progressively tilts toward young firms.
Three essays in executive compensation
(University of Alabama Libraries, 2015) Beavers, Randy; Mobbs, Houston Shawn; Cook, Douglas O.; University of Alabama Tuscaloosa
In essay one, we examine overconfident CEO-directors and find they attend more board meetings, are more active in nominating committees, and have more independent directorships. Attendance is higher when multiple overconfident directors are present on the board. When an overconfident board selects a new CEO after a CEO turnover, they are more likely to appoint a better prepared and more reputable CEO. Overconfident boards are also more likely to select an overconfident CEO. We also find overconfident boards exacerbate the restrained use of debt when an overconfident CEO is present, and we find evidence that the association between CEO-directors and greater CEO pay is driven solely by overconfident CEO-directors on the board. This evidence indicates overconfident CEO-directors exhibit significant influence on the board and over the firm's CEO. In essay two, I analyze the CEO incentives of inside debt in the form of deferred equity compensation in the context of M&A decisions. CEO inside debt holdings are negatively associated with the likelihood of the firm engaging in an M&A. When firms with higher levels of CEO inside debt decide to engage in an acquisition, those acquisitions are non-diversifying, relatively smaller deals, and are paid using a greater portion of stock. The evidence indicates that inside debt incentivizes CEOs to make less risky decisions for the benefit of debt holders and at the expense of shareholders. In essay three, I analyze both CEO inside debt and firm debt jointly to further investigate compensation incentives of risky decision-making and the resulting financial policy decisions concerning the debt structure of the firm. I find larger firms with high CEO inside debt tend to diversify, as calculated by the Herfindahl-Hirschman index of debt type usage. These types of firms use a higher percentage of term loans and other debt but a lower percentage of drawn credit lines and commercial loans. Larger firms with high CEO inside debt have lower interest rates on these debt instruments and shorter maturities, suggesting a more conservative financing policy with regards to debt.
Three essays in finance
(University of Alabama Libraries, 2014) Sikes, Candy; Cook, Douglas O.; University of Alabama Tuscaloosa
In essay one, The Impact of Information Asymmetry on Stock Split Announcement Returns, using research and development expenses as a proxy for information asymmetry, we examine the impact of information asymmetry on stock split announcement returns to provide support for the signaling theory. We find no significant difference between the announcement returns of firms with research and development expenses and those firms without research and development expenses. If the signaling theory holds, there should be a difference in these announcement returns due to the different levels of information asymmetry. As a result, the signaling theory is not supported in the context of stock splits. In the second essay, Do Mutual Fund Closures Cause the Decline in Fund Performance after Closing?, we find that closing a mutual fund is not effective at protecting fund performance but it is also not the cause of the decline in fund performance. We find that closed mutual funds do not display a consistent return pattern between the period before and after a fund closing indicating that fund closures do not have a common motivation or result. We also find that a matched group of non-closed mutual funds exhibit a return pattern that is similar to the one observed in closed mutual funds. As a result, closing a fund does not cause the decline in fund performance that is typically observed when a mutual fund closes. In the third essay, Hedge Fund Performance Before and After Fund Closure, we find that even in the place of a compensation contract that is different from the compensation contract of mutual funds, hedge funds that close exhibit a significant decline in fund performance after closing to new investors. Similar to mutual funds that close, the closure of a hedge fund is ineffective at protecting performance but it also not the cause of the decline in fund performance. Closed hedge funds do not display a consistent return pattern between the period before and after a fund closure indicating that fund closures do not have a common motivation or result. Analysis of a matched group of non-closed hedge funds shows that these non-closed funds exhibit similar growth and return patterns around fund closure again indicating that the closure of a hedge fund does not cause the resulting performance decline.