Department of Finance and Real Estate
http://hdl.handle.net/10106/24854
2024-03-29T13:28:53ZThree essays on leverage, informative trading, and option implied information
http://hdl.handle.net/10106/31683
Three essays on leverage, informative trading, and option implied information
This study will take a three-prong approach to examine the role high-leveraged option trades have in determining the informational content of options market trading. First, I closely observe the structure of the volatility spread ahead of firm-level corporate earnings events to strengthen the well documented lead-lag relationship between the option and stock markets. I find that volatility spreads driven by deep, out-of-the-money options exceed the predictability of equivalent volatility spreads that are more uniform in distribution. I then explore the differential behavioral responses of leveraged trades and earnings, such the role of the disposition effect and overconfidence. I find that while options traders do suffer from the disposition effect, they also experience profit loss due to the disposition of equity traders to hold losers following negative news releases. This occurs despite signals released by options market trading suggesting poor news may be ahead on the horizon.
Next, I conduct simulations of the return deviations for both positive and negative Leveraged Exchange Traded Funds (LETFs). I find that the compounding deviations for negative LETFs tend to be larger than those of their positive counterparts, but both tend to deteriorate during times of higher volatility. By consequence this implies, and I show, that compounding deviations are also higher for more volatile indices and lower for less volatile ones. Finally, I examine options markets of LETFs and the predictability of compounding errors over multi-day horizons through simulations of LETFs from 1996 to 2015. I find that option implied volatility in the S&P 500 does predict the performance of hypothesized returns of positive LETFs.
MANAGERS’ POLITICAL IDEOLOGY AND DEBT
http://hdl.handle.net/10106/31457
MANAGERS’ POLITICAL IDEOLOGY AND DEBT
**Please note that the full text is embargoed until 8/11/2024** ABSTRACT: This dissertation investigates the effect of managers’ political ideology and their level of managerial conservatism on their firms in the credit markets. In particular, we present three studies on the effect of managers’ political ideology and conservatism on loans’ spreads, credit ratings, and borrower-lender homophily. The level of executive's conservatism is inferred from their direct form of political donations. In chapter I, we provide an introduction that includes an overview and a background to motivate our research. In chapter II, we examine the effect of top managements’ conservatism on their firms' cost of bank loans. We find that firms with Republican-leaning executives have a lower cost of bank loans than firms with non-Republican executives. This finding persists across subsamples of firms with high and low information asymmetry. We also find that the direct effect of managerial conservatism on loan spreads is larger than its indirect effect through credit ratings.
In chapter III, we shed light on the importance of the top managers’ conservatism in the evaluation process of credit rating agencies. The literature shows that firms with Republican-leaning CEOs have higher credit ratings, and we argue that the conservatism of the management team is at least as important to credit rating agencies as the conservatism of the CEO alone. We find that firms with conservative top five executives have higher credit ratings than other firms and that the impact of top managers’ conservatism on credit ratings is both economically and statistically higher than that of the CEOs alone. We also find that the conservatism of firms’ top managers remains important to credit rating agencies even after excluding the conservatism of the firms’ CEO. Finally, we find that firms with conservative top executives have less likelihood of receiving a future credit rating downgrade than other firms.
In chapter IV, we explore the political ideology alignment between the top executives of borrowers and lenders. This study is motivated by the literature on the existence of different forms of homophily and its consequences at the organizational and inter-organizational levels. We find high political ideology homophily between the management teams of borrowers and lenders. By examining both price and non-price terms of loan contracts, we document several consequences of this relatively high homophily. In other words, we document a positive association between homophily and loan spreads; however, we find homophily to be associated with less covenant intensity and lower collateral requirements on the debt contracts. These homophily consequences indicate that both parties stand to benefit which is consistent with the homophily concept. Chapter V provides concluding remarks and highlights the main contributions.
2022-08-12T00:00:00ZThree essays on international mutual fund flows
http://hdl.handle.net/10106/30964
Three essays on international mutual fund flows
In this dissertation, I investigate the comprehensive relationship of international mutual fund flows among markets. While my first essay presents the unprecedent findings of commonality in mutual fund flows and global market integration, my second essay focuses on answering the classic question in financial market: is there any contagion in the market for asset management? In the third essay, I examine the intransitivity puzzle presented in the first essay. In the first essay, I examine global integration in the market for asset management, as indicated by the correlation of mutual fund flows across domiciles. I observe no leading role for the US relative to flows in other domiciles. I do 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 the second essay, I examine the evolution of contagion over time and across conditions in the market for asset management. First, I examine the time trend in cross-domicile mutual fund flow correlations during recent decades. Second, I model contagion in fund flows during different conditions of market stress. Last, I investigate changes in cross-domicile flow correlations during and after the financial crisis of 2006-2008. Results indicate that there was a peak in market contagion during the financial crisis period, and correlations decreased in the following periods. In the third essay, I examine how international mutual fund (MF) flows are largely uncorrelated with the United States’ (US) MF flows, although non-US MF flows are associated with non-US MF returns, non-US MF returns are strongly associated with US MF returns, and US MF returns are associated with US MF flows. I refer to this puzzle as the intransitivity of international MF flows. To explain the intransitivity of international MF flows, I decompose domicile-level MF returns into a component that is associated with US returns and an idiosyncratic domicile-level return component. I then decompose US MF flows into an expected component based on US MF returns and an unexpected component. I explain the intransitivity puzzle by showing that domicile fixed-effects, macro-economic control variables, and the aggregation of fund-level data to domicile-level flows reconcile the apparent inconsistencies in the international MF flow and performance associations.
2022-06-13T00:00:00ZThree Essays on Political Contributions and Firm Performance
http://hdl.handle.net/10106/30940
Three Essays on Political Contributions and Firm Performance
The interaction of politics with financial markets and the macroeconomy has received increasing attention in recent years. Extant literature identifies the significant impact of political connections on firm value. However, several questions in this area remain unanswered.
My dissertation consists of three essays. In the first essay, I examine the impact of economic policy uncertainty (EPU) on total campaign contributions and the relative contributions to Republicans and Democrats. I find that the total Political Action Committee (PAC) contributions by firms increase following an increase in EPU. This is also true for the contributions to each major political party, i.e., Republicans and Democrats. I also find that the contribution to Republicans relative to Democrats, as measured by the proportion of contribution to Republicans and the gap between Republican and Democratic contributions, increases after heightened EPU. Thus, while contributions to both parties increase, the increase is more for Republicans. I find that PAC contributions help mitigate the negative impact of EPU on firm performance, proxied by return on assets. I also investigate the relationship between contributions and EPU for sub-samples such as conservative and liberal firms, etc.
The second essay examines the mechanism behind the impact of Real Estate Investment Trusts (REIT) political contributions on firm value. I find that REITs that politically contribute have better operational performance in the following year. Contributing REITs experience lower systematic and idiosyncratic risk in the following year. I also find that REITs with a large pipeline of properties under development contribute more to political candidates through the National Association of Real Estate Investment Trusts Inc. (NAREIT) PAC. In addition, contributing REITs with a large pipeline of undeveloped properties experience higher fund flow from operations (FFOs) and lower risk in the following year.
In the third essay, I analyze the difference between campaign contributions by highly regulated firms and less regulated firms. I find that highly regulated firms contribute more than less regulated firms. Both highly regulated and less regulated firms donate more to Republicans than Democrats. The contributions to Republicans relative to Democrats are much greater when Republicans have a majority. For both chambers of Congress, contributions by heavily regulated firms to Republicans and Democrats increase when their party has a majority. I also find a positive relation between contributions by heavily regulated firms and future returns, which shows that the connections built through contributions are economically valuable.
2022-08-12T00:00:00Z