<p>This thesis examines how various agency frictions affect corporate financing, capital budgeting, managerial compensation and investment in dynamic settings. In the internal capital budgeting process, the agency issues considered are (i) the division manager privately observes project arrival and quality, and (ii) he can divert allocated capital. The optimal capital budgeting and compensation policies are jointly designed to mitigate agency costs that are endogenously determined. When the division's financial slack is low, positive NPV investments are possibly forgone and manager's pay-performance sensitivity is kept small. When the division's financial slack is high, projects are funded more efficiently and steeper incentives are provided. In the process of external financing, the key friction considered is that the agent has persistent private information about firm performance. In the optimal contract, the firm is financed by outside equity and a credit line contingent on compliance with a cash flow covenant. The agent is compensated via a combination of equity and stock options. As the level of persistence increases, the agent holds less equity and more stock options; the investors hold more equity. Investment is possibly efficient in the constrained firm and is varying with cash flow in the unconstrained firm.</p> / Dissertation

In the first essay, I study stock price movements during the trading day and find that retail trading activity generates excess intraday volatility. I develop a simple econometric measure which reveals that volatility realized during the trading day is too high to be reconciled with volatility achieved over the entire trading day. High intraday volatility stocks temporarily outperform low intraday volatility stocks by approximately 59 basis points over the next month. This temporary outperformance is due to retail investor price pressure, which I identify using the detailed brokerage dataset of Barber and Odean (2000) as well as a novel time-series dataset obtained from parsing the financial statements of Charles Schwab and E TRADE. The second essay considers how tax-motivated selling generates temporary distortions in stock prices around the turn of the tax year. As investors face the trade-off between selling a temporarily-depressed stock this year and selling next year but delaying tax implications by one year, the magnitude of the stock’s price distortion is a function of its cost basis, the capital gains tax rate, and importantly, the interest rate. Each of these components explains variation in US stock returns as well as retail investor selling behavior around the turn of the tax year. Similar results in the UK provide out-of-sample confirmation, as tax and calendar years differ. The third essay develops a real business cycle model with time-varying inflation risk and optimal, but infrequent, capital structure choice. In the model, more volatile inflation or more procyclical inflation leads to quantitatively important increases in credit spreads. Intuitively, this result obtains because inflation persistence generates large uncertainty about the price level at long maturities and because firms cannot adjust their capital structure immediately. Across a panel of six developed economies, credit spreads rise by 15 basis points if either inflation volatility or the inflation-stock return correlation increases by one standard deviation. Firms counteract higher debt financing costs by adjusting their capital structure in times of higher inflation uncertainty.

<p>In transactions where costly efforts from both the seller and the buyer help prevent selling to the unfit buyer, the unique optimal law that restores the first-best requires the seller to refund the buyer and pay a punitive penalty of the buyer's loss. If the social planner can infer from a loss whether efficient efforts had been exerted, the law with contingent punitive penalty always restores the first-best with a balanced actual budget. The law is harsher for one-stop than for specialized purchase, as a loss is more likely due to shirking. Higher budget surplus cost can make the social optimum more implementable. We study constrained optima if the first-best is unattainable or if a balanced budget is enforced. With costless efforts or unilateral moral hazard or no effort choices, no punitive penalty is needed to always restore the first-best with a balanced budget. Bilateral moral hazard rationalizes punitive penalty and determinacy of law yet complicates regulation. Our model applies widely to many goods and services and yields novel predictions.</p><p>I also study efficient disclosure by contingent non-disclosure. I show that if the sender is not always active and receivers do not know if the sender is active, then compound information can be efficiently conveyed only if some information is withheld contingently. Our theory has wide applications in fields like political economy, public policy, and law. It is optimal for the benevolent social planner to purge dissident yet useful information so as to convey the more welfare-relevant information to its citizens. Even the most liberal and transparent government should implement undemocratic policies for the citizens' own good. Transparency or disclosure laws can hurt citizens. We contribute to the economic theory of information transmission, and identify a new situation where the sender's interest is perfectly aligned with receivers', more information always helps receivers, yet it is optimal to contingently block some information away from receivers. Our theory has novel predictions and policy implications.</p> / Dissertation

The primary purpose of this paper is to test the hypotheses developed by Dr. Kanungo on job involvement attitudes in a cross-cultural context. This paper attempts to show that prior socialization determines the saliency of needs in an individual; and, as long as these salient needs are perceived to be satisfied on the job, the person would be highly involved in his work, irrespective of his cultural background. The secondary purpose of the paper is to test whether organizations act as vehicles for the satisfaction of the various salient needs of the individual.

In this dissertation, I offer three independent studies that each contribute to the literature on mortgage debt payment. In the first paper, I examine the recent phenomenon of mortgage curtailment (borrowers making voluntary partial prepayments) and link this behavior to consumer deleveraging trends. In the second paper, I use the curtailment measures developed in the first essay to examine heterogeneity in sensitivity to current mortgage leverage in default decisions. Considering the group of borrowers who have previously curtailed mortgage debt, I posit such borrowers should be less sensitive to current leverage than borrowers without past curtailments because previous curtailers have revealed a lower value on the embedded option to default on their loan because to do so would forfeit the full amount of past partial prepayments. Indeed, I show that for borrowers estimated to have negative equity positions, borrowers with past curtailments have approximately 30-50% less sensitivity to current leverage than borrowers who have never made extra payments. Finally, in the third essay I examine the role of income stability in mortgage default decisions. I study default decisions in a sample of borrowers (governmental employees from Clark County NV, FY2009--2010) whose current employment and income is known with certainty and future prospects for continued employment are above average. I find that while the group with known employment has a lower default rate than the remainder of homeowners (whose employment status is unknown), but both groups have the same sensitivity to mortgage leverage. Both the second and third studies provide evidence of strategic default behavior in the residential mortgage market and suggest that when faced with a wave of mortgage defaults, investors and policymakers cannot provide solutions targeted towards ability to pay without addressing declines in asset values.

This dissertation studies institutional investment in U.S. bank holding companies (BHCs). The first essay examines institutional investing preferences in U.S. banks and the impact of expansion of bank power on the preferences. Institutional investors prefer BHCs that hold more liquid assets, are better capitalized and larger in size, have better loan quality, lower stock return volatility and less derivative trading. In addition, the expansion of bank power is welcomed by various types of institutional investors, except for long-term institutions. Institutional investors also become less risk-averse when investing in BHCs that have expanded into non-banking business. However, the increased complexity and opaqueness of banks makes it harder for institutional investors to implement informative tradings, though grey and long-term institutions are less adversely affected than independent and short-term institutions. The second essay focuses on the 2008 financial crisis and investigates the under-researched area the role of institutional investors in financial industry during crisis time. It provides evidence that grey institutions (i.e. banks and insurance companies) have more information about banks risk exposure to securitization than do independent institutions (e.g. investment companies and public pension funds) as they shy away from banks with high risk exposure to securitization market, such as BHCs that hold more private-label MBS or BHCs that issue riskier securitization deals before the crisis. In addition, the trading of grey institutions before the crisis can also predict high-exposure banks abnormal returns around the Lehman Bankruptcy and is related to such banks operating performance during the crisis period.

<p>I study firms' debt maturity decisions. I provide two models for optimal debt maturity choices when facing stochastic productivity and rollover risk. The first model is based on firms' need to smooth their capital when facing uncertainties in external financing. When the capital market freezes, new external financing is difficult. Firms with large debt repayments due have to forego good investment opportunities and in severe cases cut back on dividends. Long-term debt reduces immediate repayments and allows firms to keep the borrowed capital for future production. Therefore, when freezes are likely, firms respond by using more long-term financing and are better prepared. However, when the probability of freezes is low, firms turn to short-term financing. When a freeze suddenly occurs, the impact is significant and costly. The model predicts that constrained firms use more short-term debt. Based on the model, I propose investment-debt sensitivity as a new measure for financial constraints.</p><p>The second model depicts an economy in which entrepreneurs reallocate capital resources through borrowing and lending in either short-term or long-term debt. In expansions, productivity is more persistent and uncertainty in productivity is low, so entrepreneurs can better predict their future prospects. Hence, they choose to use more long-term debt to finance their productions. In recessions, future prospects are less clear to the entrepreneurs; therefore, they choose to use more short-term debt. The model explains the documented facts on pro-cyclical debt maturity in the economy. It also highlights that the shortening debt maturity structure causes capital resources to be less efficiently allocated in recessions further exacerbates the bad times. I argue that the change in the predictability of TFP drives pro-cyclical debt maturity, and that the maturity structure further amplifies the fluctuations in aggregate production.</p> / Dissertation

This dissertation studies how the affiliation between different entities in securitization process make different market outcomes, and how this estimation of affiliation effects is susceptible to limitations in securitized residential mortgage data. Three essays constitute the dissertation. The first essay illustrates the limitations and potential bias in the loan-level trustee data. Substantial amounts of loan attributes and risk factors are missing. The patterns of data omissions dramatically vary across different risk factors, sponsors, and trustees, and over the time. Missing of one risk factor is in general positively correlated with missing of the other. Omissions of loan attributes are systematically associated with intermediate level of ex-post default risk. These findings suggest that if any data is sliced and diced based on the availability of loan attributes, the sample for default regression model may not be random. The second essay examines how default risk is associated with the affiliation between the loan provider and the sponsor. The identity of loan provider is, however, selectively disclosed for riskier mortgages. Without consideration of this selective disclosure, the affiliation is seemingly linked to higher ex-ante and ex-post default risk. In contrast, if the affiliation is correctly calculated by backfilling loan provider identity, or if the sample selection problem is explicitly addressed, then loan providers cherry-pick mortgages with better ex-ante risk characteristics for their affiliated securitizations. Also, with more complete sample where missing and erroneous loan provider identities are backfilled and corrected, the affiliation between the loan provider and the sponsor is shown to significantly decrease the likelihood of default. The third essay examines why sponsors are concerned about the performance of mortgages even after they are securitized and sold to investors in the form of bonds. Without any empirical tests, previous studies assume that sponsors have skin in the game because they retain the certificates backed by the residual tranches. However, I show that sponsors with their own servicing platform increase their servicing quality even after the most junior tranche has dried up. This result implies reputational concerns may make sponsors care about performance of securitized mortgages.

Firms can change their outstanding shares to manage their stock price levels. Those with lower stock prices tend to attract more speculative trading, which causes higher price volatility and may force their managers to excessively focus on short-term earnings at the expense of R&D and other long-term projects. Thus, I hypothesize that keeping high stock price levels allows firms to (i) limit speculative traders influences on stock prices and thus mitigate investor short-termism, and (ii) enhance R&D productivity. Indeed, I find that high-priced firms are less likely to cut R&D to reverse an earnings decline, less likely to fire their CEOs, and have more innovation. All these findings are robust after controlling for institutional ownership, a factor that has been shown in the literature to have a correlation with share price and also have a significant impact on R&D policies and innovation. For robustness checks, I examine stock splits, which allow mangers to re-set their stock price levels, and IPOs in which managers set an offering price range before shares are publicly traded. Consistent with my hypothesis, I discover that innovative firms are less likely to split their stocks, and that innovation declines after firms split their stocks. Furthermore, IPO firms that set higher offering prices, not those that attract more institutional ownership, have more future innovation. Thus, the results imply that, rather than being forced or assured by institutional investors to innovate as the extant literature suggests, managers of innovative firms actively support high stock price levels to foster innovation.

L'industrie du capital-risque constitue une composante significative au financement des projets novateurs. Comme tels, ces derniers comportent des risques qu'il est impérieux de partager avec d'autres partenaires. Le capital-risque est né de l'aversion des institutions financières traditionnelles à financer les projets au-delà d'un certain seuil de risque. Nous définissons le capital-risque comme l'apport de capital non garanti dans un esprit de partenariat. Relever les critères / indicateurs objectifs qui fondent la décision d'investir des sociétés de capital-risque (S.C.R.), tel est le but de ce mémoire. Pour ce faire nous avons mis au point un questionnaire pour valider un ensemble de critères et indicateurs susceptibles d'être pris en compte dans une évaluation financière et non financière. Ceci a été fait en collaboration avec des praticiens de l'évaluation d'entreprise et de projets d'investissement. De cette pré-enquête, il est résulté un questionnaire pertinent à l'objet de notre mémoire. Dans le but de s'assurer de l'objectivité des réponses à notre questionnaire, les critères ont été assortis d'indicateurs pertinents permettant de leur conférer une mesure. Ainsi, des instruments de mesure ont été construits à l'aide d'une échelle ordinale de cinq points; l'importance accordée à tout critère/indicateur a été mesurée. Des graphiques et des tableaux ont été construits permettant de représenter et de visualiser cette évaluation. Ces instruments comportent certes des limites mais ils rendent fidèlement compte de l'évaluation des critères/indicateurs et confèrent un cadre méthodologique adéquat à notre recherche. L'évaluation rejoint de multiples aspects de la réalité de l'entreprise et d'un projet d'affaire. Les résultats de cette recherche démontrent l'existence effective de critères/indicateurs. De plus, ils insistent, par le nombre prépondérant des indicateurs validés, sur l'objectivité des décisions d'acceptation ou de refus lors de l'évaluation des projets présentés aux organismes de capital-risque. Il apparaît aussi que ces critères/indicateurs doivent être connus des requérants de capital-risque pour leur permettre d'améliorer la présentation de leurs projets et d'éviter ainsi le gaspillage des ressources financières qu'entraînent ces rejets.