EMPIRICAL ESSAYS ON FINANCIAL ECONOMICS

Abstract

Using institutional investors’ holdings data from Thomson Reuters’ 13F filings, the first chapter studies and tests the market microstructure invariance hypothesis proposed by Kyle and Obizhaeva (2016a), and in particular its implied −2/3 law on the relationship between investors’ bets and stock trading activity, defined by the product of price, volume, and volatility. With the identifying assumption that institutional asset managers’ holdings are proportional to their bets, our empirical results support the −2/3 law implied by the invariance hypothesis. The −2/3 law is robust to a variety of estimation strategies and robustness checks. Then we study whether distributions of bets are invariant and log-normal. Data strongly support the hypothesis before March 1998, and the weak version of the invariance hypothesis (the mean of distributions of bets is invariant) continues to hold in the remaining periods. The strong version failing to hold after March 1998 may be due to adjustment costs and very tiny positions.

The second chapter studies the role of convertible debt on investment. Convertible debt in the capital structure facilitates investment for a firm (especially for a firm with high leverage) since it reduces the firm's interest payments and leverage upon conversion, making it easier for the firm to issue new financial instruments. However, the same property may bring an agency issue: The potential of conversion into equity dilutes existing shareholders' profits, decreasing the firm's motivation to do investment. We hypothesize that the agency issue brought by convertible debt is minimal in very competitive markets since the external pressure is high, so that the facilitation role may outweigh the dilution role, suggesting a positive effect on investment, and that the agency issue brought by convertible debt may outweigh or just offset the facilitation role in less competitive markets since the external pressure is not high, suggesting a negative or insignificant effect on investment. Using data from Compustat, we find that convertible debt has a positive and quadratic effect on investment rates in competitive industries (industries with very low HHI), a negative and quadratic effect on investment rates in oligopoly industries (intermediate HHI), and an insignificant effect on investment rates in highly monopolistic industries (high HHI). These effects are robust to including different control variables. We also suspect the interaction of warrants and competition has similar effects. These results may have implications on the announcement effects or long term effects of convertible debt issuance under different industry structures.