Finance Theses and Dissertations
Permanent URI for this collectionhttp://hdl.handle.net/1903/2771
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Item Unmapped Holdings and the Performance Measurement of U.S. Equity Mutual Funds(2009) Hunter, David L.; Wermers, Russell; Business and Management: Finance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This paper investigates a dataset that provides information about assets held by U.S. equity mutual funds, but are not U.S. equities (`unmapped holdings'). I show the widespread presence of these assets and investigate how they are used within mutual fund portfolios. I find that their effects are statistically significant upon both portfolio risk and return. They can either hedge or complement mapped asset returns. I show that predictability of mutual fund returns are reduced when unmapped holdings returns are controlled. Since unmapped holdings returns are not observable, I define an econometric technique that in chapter two that can control for their effect. This technique uses an average return (an `endogenous benchmark') to control for common but immeasurable or unobservable characteristics in a group of funds. I find that an `endogenous benchmark' alone produces estimates nearly as good as those using common risk factor regression models. By combining an endoge- nous bechmark with other risk factors in regression models, I find that estimates are improved.Item Essays on Asset Purchases and Sales: Theory and Empirical Evidence(2006-08-09) YANG, LIU; Maksimovic, Vojislav; Finance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation consists of a theory essay and an empirical essay that investigate a firm's decision to buy or sell corporate assets. It seeks to answer the following research questions: (1) why do firms choose to buy or sell assets? (2) what makes assets in an industry more likely to be traded than assets in other industries? and (3) within an industry, why asset sales come in waves and tend to cluster over a certain time period? In my theory essay, "The Real Determinants of Asset Sales", I develop a dynamic equilibrium model that jointly analyzes firms' decisions to buy or sell assets and the activity of asset sales in the industry. In my model, a firm maximizes its value by making two inter-related decisions: how much to invest in new assets and whether to buy or sell existing assets. These decisions are made under both firm- and industry-level productivity shocks. The model is solved through simulations and it is calibrated using the plant-level data from Longitudinal Research database. I show that most of the empirical evidence documented in the literature on asset sales is consistent with value-maximizing behavior. In my empirical essay, "What Drives Asset Sales - The Empirical Evidence", I test the model's predictions using the plant-level data from Longitudinal Research Database on manufacturing firms in the period of 1973 to 2000. The patterns of transactions (firm-level purchase/sale decisions, and the cross-industry and the time-series variation in asset sales activities) are consistent with my theoretical model.Item Essays in Financial Economics(2006-04-26) Ullrich, Carl; Bakshi, Gurdip; Finance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Essay 1, Constrained Capacity and Equilibrium Forward Premia in Electricity Markets, develops a refinement of the equilibrium electricity pricing model in Bessembinder and Lemmon (2002). The refined model explicitly accounts for constrained capacity, an important feature in electricity markets. Explicitly including a role for capacity allows the model to reproduce the price spikes observed in wholesale electricity markets. The refined model implies that the equilibrium forward premium, defined to be the forward price minus the expected spot price, is decreasing in spot price variance when the expected spot electricity price is low, but is increasing in the spot price variance when the expected spot electricity price is high. Further, the refined model implies that, ceteris paribus, the equilibrium forward premium is increasing in the ratio of the expected spot electricity price to the fixed retail price. The implications of this model are closer to reality. How does currency return volatility evolve over time and what are the properties of volatility dynamics? Is the drift of currency return volatility non-linear? What forms of non-linearities are admitted in the drift and diffusion functions? The purpose of essay 2, Estimation of Continuous-Time Models for Foreign Exchange Volatility, is to estimate a large class of volatility processes and explore these issues using weekly data on two currency pairs: U.S. dollar-British pound and Japanese Yen-U.S. dollar. The estimation approach is based on maximum-likelihood estimation that relies on closed-form density approximations (A\"it-Sahalia 1999, 2002). Based on volatility implied by currency options, the constant elasticity of variance specification provides a reasonable characterization of the variance of variance function. Extending the diffusion function beyond the CEV specification does not improve the fit of the model, regardless of the assumed form of the drift function. Further, I find that certain types of non-linearities in the drift function improve the goodness of fit statistics, though no generalizations can be made.Item Empirical Essays in Corporate Finance(2005-04-20) Minnick, Kristina Leigh; Senbet, Lemma; Prabhala, Nagpurnanand; Finance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Over the past twenty years, write-offs have grown in popularity. With the increased usage of write-offs, it is becoming more important to understand the mechanisms behind why companies take write-offs and how write-offs affect company performance. In this paper, I examine the cross-sectional determinants of the decision to take write-offs. I use a hand-collected dataset on write-offs that is much more comprehensive than existing write-off datasets. Contrary to much hype and scandals surrounding a few write-offs, I find that quality of governance is positively related to write-off decisions in the cross-section. My results also suggest that poor governance companies wait to take write-offs until it becomes inevitable, while well-monitored companies take write-offs sooner. As a result, the charge is substantially larger than the average write-off charge. When these poor governance companies announce write-offs, the announcement generates negative abnormal returns. However, when good corporate governance companies announce write-offs, the charge is substantially smaller than the average charge. These well-monitored companies take write-offs immediately following a problem. Following the write-off announcements of these types of companies, average announcement day effects exceed a positive six percent. These results suggest that companies with quality monitoring mechanisms use write-offs in a manner that is consistent with enhancing shareholder value. In my second essay I examine the effect of write-off announcements on the stock market liquidity of firms taking write-offs from 1980 to 2000. I find that there are substantial improvements in stock market liquidity following corporate write-offs. Spreads decrease and turnover volume increases after write-off announcements, which indicates an improvement in liquidity. The liquidity improvement is greater for better governed companies. I decompose bid-ask spreads and show that adverse selection costs decrease substantially as market participants respond to the write-off announcement. The evidence suggests a liquidity benefit of write-offs that must be weighed against any other perceived cost of write-offs. Such a liquidity benefit may validate that write-offs convey favorable information about the firm.Item Essays on Law, Finance, and Venture Capitalists' Asset Allocation Decisions(2005-07-28) Obrimah, Oghenovo Adewale; Maksimovic, Vojislav; Finance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation consists of three essays. The first essay finds that small firms in poor quality legal environments (poor quality contract enforcement and property rights environments) are more financially constrained relative to small firms in better quality legal environments. Consequently, financial development, that is, the emergence of venture capitalists, has a greater effect on small firms' access to external financing in poor quality legal environments. The second essay finds that the quality of contract enforcement is a risk factor, while the quality of property rights protection is not. The results indicate that poor quality property rights protection hinders the development of informal capital markets; hence, there exists a greater need for financial intermediation in such environments. These results indicate that venture capital financing should be encouraged in poor quality legal environments and provide one rationale for why capital markets in poor quality legal environment countries tend to be bank-based. The third essay finds that the demand for growth financing is lower in poor quality legal environments relative to better quality legal environments. The existing literature has focused on the effect that limited supply of external financing has on firm growth rates in poor quality legal environments. This paper indicates that lower firm growth rates in poor quality legal environments may also result from lower demand for growth financing. The empirical results in all three essays indicate that poor quality legal environments primarily affect the development of informal capital markets. Hence, financial intermediation is of greater importance in poor quality legal environments during the early stages of a firm's growth cycle. This indicates that encouraging the growth of venture capital financing, which is better suited to ameliorating moral hazard problems (investments in small firms and technology intensive ventures) relative to debt or bank financing, will facilitate faster economic growth in poor quality legal environments. Evidence that venture capitalists' asset allocations are significantly and positively associated with long-run country growth rates is provided in the second essay.Item Three Essays on Volatility Issues in Financial Markets(2005-05-31) Panayotov, George; Madan, Dilip B.; Finance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Studies of asset returns time-series provide strong evidence that at least two stochastic factors drive volatility. The first essay investigates whether two volatility risks are priced in the stock option market and estimates volatility risk prices in a cross-section of stock option returns. The essay finds that the risk of changes in short-term volatility is significantly negatively priced, which agrees with previous studies of the pricing of a single volatility risk. The essay finds also that a second volatility risk, embedded in longer-term volatility is significantly positively priced. The difference in the pricing of short- and long-term volatility risks is economically significant - option combinations allowing investors to sell short-term volatility and buy long-term volatility offer average profits up to 20% per month. Value-at-Risk measures only the risk of loss at the end of an investment horizon. An alternative measure (MaxVaR) has been proposed recently, which quantifies the risk of loss at or before the end of an investment horizon. The second essay studies such a risk measure for several jump processes (diffusions with one- and two-sided jumps and two-sided pure-jump processes with different structures of jump arrivals). The main tool of analysis is the first passage probability. MaxVaR for jump processes is compared to standard VaR using returns to five major stock indexes over investment horizons up to one month. Typically MaxVaR is 1.5 - 2 times higher than standard VaR, whereby the excess tends to be higher for longer investment horizons and for lower quantiles of the returns distributions. The results of the essay provide one possible justification for the multipliers applied by the Basle Committee to standard VaR for regulatory purposes. Several continuous-time versions of the GARCH model have been proposed in the literature, which typically involve two distinct driving stochastic processes. An interesting alternative is the COGARCH model of Kluppelberg, Lindner and Maller (2004), which is driven by a single Levy process. The third essay derives a backward PIDE for the COGARCH model, in the case when the driving process is Variance-Gamma. The PIDE is applied for the calculation of option prices under the COGARCH model.Item INTERNATIONAL CORPORATE GOVERNANCE: A STUDY OF COMPLEMENTARITIES AND CONVERGENCE(2004-08-31) Ayyagari, Meghana; MAKSIMOVIC, VOJISLAV; Finance; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This thesis contributes to contemporary research in international corporate governance by investigating two related questions: (1) Is there a convergence in corporate governance towards the US model as suggested by theories of functional convergence and (2) How do differing regulatory environments influence the choice of corporate governance instruments? In Part I, I examine if firms from poor investor protection regimes bond themselves to better corporate governance by listing on exchanges in more protective regimes, such as the US, thereby achieving functional convergence. I study the effect of cross-listing on ownership and control structures in a sample of 425 firms from 42 countries that cross-list on a major exchange in the US. I find the following features post cross-listing: (1) Very few firms (11 out of 262) migrate to a dispersed ownership structure, contrary to the theory that firms change their corporate governance structure by bonding to US laws (2) A significant fraction of firms experience control changes where the original controlling shareholder sells his control block to a new owner (3) 45% of the control changes result in a foreign owner and individual firm characteristics like small size and low leverage are strong predictors of a foreign control change (4) Firms that undergo a control change significantly increase their debt capacity. The findings of this section show that foreign firms use cross-listing as a means to sell control blocks and increase debt capacity rather than as legal bonding mechanisms. In Part II, I provide a theoretical motivation for the empirical finding in Part I, by deriving the features of an optimal governance system as a function of the level of investor protection in the economy. The model predicts that in an environment of poor investor protection, ownership, leverage and monitoring are complementary instruments of corporate governance where the use of one instrument increases the marginal benefit of the other. The model suggests that one cannot expect to see convergence in governance systems by changing only one aspect of the complementary cluster. Empirical evidence of the complementarities suggested by the model is provided using a sample of transition economy firms from the Amadeus Database. The two parts of the thesis together show that selection of corporate governance mechanisms involves complementarities between the mechanisms and the regulatory environment and we are not likely to see a convergence in governance structures unless there is a significant convergence in legal rules shaping the governance structures.