Thesis advisor: Thomas Chemmanur / My dissertation is comprised of three chapters. In this first chapter, I study the effect of social connections on mutual fund investors' information production and accuracy of their signals. While connected investors have access to information in their social network (information diffusion effect), social connections also reduce their incentives to acquire costly information, since they can free ride on connected peers ("free riding on friends" effect). I find this negative "free riding on friends" effect of social connections dominates information diffusion effect in the mutual fund industry, using fund managers' connections built upon their prior career experiences. First, I find that connected funds are more likely to hold the same stocks and to trade in the same direction, relative to unconnected funds. Second, I find that funds with lower network centrality earn higher alphas, even after controlling for other fund and manager characteristics. A one-standard-deviation increase in eigenvector centrality predicts a decrease of 29-37 basis points in annualized fund alphas. Third, when I define a stock-level variable PMC (Peripheral minus Central) as the difference in average portfolio weights between peripheral funds and central funds, I find that stocks with higher PMC have significantly higher abnormal stock returns. A one-standard-deviation increase in PMC predicts an increase of 1.48%-1.52% in the next quarter risk-adjusted returns (annualized). Finally, I find that PMC predicts firms' future earnings surprises. In the second chapter, co-authored with Thomas Chemmanur, Yingzhen Li, and Jie Xie, we propose a "noisy signaling" hypotheses of open market share repurchase (OMSR) programs, where the equity market equilibrium that prevails after OMSR program announcements is a partial pooling rather than a fully separating equilibrium. We argue that two complementary mechanisms, namely, actual share repurchases by firms and information production by institutions, serve to reduce the residual equity market information asymmetry facing firms subsequent to OMSR program announcements. We test the implications of this noisy signaling hypothesis using transaction-level data on trading by institutions and by a subsample of identified hedge funds, and find strong support for the above hypothesis. In the third chapter, co-authored with Thomas Chemmanur, and Jiekun Huang, we analyze how the geographical locations of institutions affect their investments in IPOs and various characteristics of the IPOs that they invest in. We argue that institutions geographically close to each other may free-ride on each other's information when evaluating IPOs, resulting in IPOs dominated by geographically clustered institutions reflecting less accurate information signals compared to those dominated by geographically dispersed institutions. We find that the equity holdings of institutions in IPOs are influenced more by the investments made by neighboring institutions. We show that an increase in the geographical dispersion of the institutions investing in an IPO is associated with higher IPO price revisions, higher firm valuations at offering and secondary market, larger IPO initial returns, greater long-run post-IPO stock returns lower information asymmetry facing an IPO firm in the equity market. Finally, the predictive power of institutional trading post-IPO for subsequent long-run stock returns and earnings surprises for the first fiscal-year end after the IPO is greater for geographically isolated institutions compared to those that are geographically clustered. / Thesis (PhD) — Boston College, 2017. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

Thesis advisor: Edith Hotchkiss / Chapter one of this dissertation provides new evidence on the existence of dividend clienteles for institutional investors. We directly examine individual institutions' preferences for dividend paying stocks based on the characteristics of stocks held in their portfolio. Many institutions follow persistent investment styles, maintaining relatively high or low dividend yield portfolios over time. Institutions which hold portfolios of higher yielding stocks are significantly more likely to increase their holdings in response to a dividend increase or sell their stock in response to a decrease. For a subset of institutions, we directly observe the proportion of their portfolio managed on behalf of taxable clients. Consistent with tax-induced dividend clienteles, institutions with more taxable clients are less likely to increase their holdings in response to a dividend increase. Finally, we show that stock price reactions to announcements of dividend increases are related to characteristics of the institutions holding the stock. Our results suggest that tax status, as well as other factors are important in explaining observed clientele behavior. Chapter two explores the determinants of heterogeneity in institutional investor portfolio preferences and the relationship between institutions and the clients they serve. I find that the characteristics of an institution's clients and the characteristics of the institution itself are both important determinants of portfolio preferences and trading behavior. Specifically, I find that institutions traditionally subject to prudent investor laws are more likely to invest in high quality stocks, although, institutions sub-managing money for pension funds are less prudent than pension managers themselves. In addition, I find that institutions with taxable clients are likely to avoid unnecessary dividend taxation and turn over their portfolios less frequently. More generally, institutions exhibit systematic shifts in their exposure to common risk factors that may be explained in part by the levels and changes in client composition. While evidence for a causal link between client shifts and institutional preferences is limited to mutual funds, contemporaneous changes in clients and portfolio characteristics suggest that the dynamics of institutional investment are closely related to the nature of the clients served. / Thesis (PhD) — Boston College, 2007. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

[pt] A separação entre propriedade e controle abre espaço para importante assimetria de informação e, consequentemente, surge o problema de risco moral associado à perspectiva de expropriação dos investidores (outsiders ou principais) pelos controladores e executivos da empresa (insiders ou agentes). O objetivo desta tese é, por meio de uma análise qualitativa, ilustrar em que medida os Fundos de Pensão, enquanto importantes investidores institucionais no Brasil, são capazes de mitigar o chamado risco de agência incentivando as chamadas boas práticas de Governança Corporativa e agregando valor nas empresas que compõem seus portfólios. / [en] The separation of ownership and control leads to information asymmetry and, consequently, to a moral hazard problem related to the perspective of expropriation of investors (outsiders or principals) by managers and controlling shareholders (insiders or agents). Based on case studies, this thesis aims at assessing Brazilian institutional investors capability to mitigate the so called agency risk notably in related parties transactions. More specifically, it will use a qualitative analysis to investigate to which extent Pension Funds activism has effect on companies` corporate governance rules and value.

This study investigates to what level private Nordic investors allocate capital to different types of assets, a phenomenon known as diversification. Additionally, it examines if the degree of diversification influences the investor’s economic welfare. To carry out this study, the authors of this paper took part of data containing information about 80,000 Nordic investors and their investments. This data was processed by a computer program to create a cross-sectional data set, enabling the authors to make conclusions about the average Nordic investor. The study shows that private Nordic investors succeed in their ability to diversify with respect to the total number of stocks, but that their investment choices cause their investments to be inefficient. The investor holds stocks highly correlated to one another, resulting in economic costs.

A relevância da informação contábil está na capacidade de uma informação fazer a diferença na tomada de decisão dos usuários da contabilidade, em razão da alteração de suas expectativas quanto ao desempenho das entidades. Os investidores e credores tomam suas decisões fundamentadas na contabilidade com um objetivo em comum: o provimento de capital. Nesse contexto, as decisões desses usuários são a negociação de ativos ou ações das empresas pelos investidores, refletida nos movimentos do preço das ações, e a concessão de crédito às empresas pelos credores, refletida no financiamento obtido pelas empresas tomadoras de crédito. Os mecanismos de proteção adotados por esses usuários (BURKART; GROMB; PANUZI AL, 1997; STRAHAN, 1999; BEBCHUK; KRAAKMAN; TRIANTIS, 2000; NIKOLAEV, 2010; ARMSTRONG; GUAY; WEBER, 2010) e suas diferentes necessidades informacionais (HEALY; PAPELU, 2001; BALL; ROBIN; SADKA, 2008; PEEK; CUIJPERS; BUIJINK, 2010), assim como a função intrínseca dos modelos de VR (value relevance) e CR (credit relevance) trouxe a premissa de que as informações contábeis utilizadas por esses dois agentes econômicos são diferentes em suas decisões de provimento de capital. Os dados contábeis relevantes são em grande parte evidenciados para os investidores nos estudos de VR (DEVALLE; ONALLI; MAGARINI, 2010; CLARKSON et al., 2011; TSALAVOUTAS; DIONYSIOU, 2014; BARTH et al, 2014; CLOULT; FALTA; WILLETT, 2016). No entanto, há poucas evidências a respeito da relevância contábil para os credores (HOLTHAUSEN; WATTS, 2001; FLOROU; KOSI, 2015), sendo que o mercado de crédito corresponde a uma fonte de recursos substancial para as empresas (BEIRUTH, 2015; BEIRUTH et al., 2017). Os estudos de CR (HANN; LU; SUBRAMANYAM, 2007; KOSI; POPE; FLOROU, 2010; WU; ZHANG, 2014) atestaram que as informações contábeis úteis para a estimativa do risco de crédito são relevantes para os credores e impactam a decisão dos analistas de agências de classificação de risco. Assim, a partir da premissa subjacente de que as informações contábeis para credores e investidores são diferentes, o objetivo geral da pesquisa foi verificar se as informações contábeis relevantes são diferentes para os credores e para os investidores em suas decisões de provimento de capital. Os objetivos específicos foram identificar se as informações contábeis são menos relevantes para os credores por empréstimos na condição de maior risco informacional (menor enforcement) e se são mais relevantes nas situações de maior risco de crédito (maior alavancagem e baixa classificação dos ratings de crédito). A análise contemplou as empresas de 25 países no período de 2010 a 2015, com a aplicação do modelo de VR e do modelo proposto para o credor por empréstimo (VCR). Os resultados indicaram que todas as informações foram relevantes para os investidores, porém nem todas foram relevantes para os credores. Esta evidência significa que os modelos de decisão desses dois grupos de usuários são diferentes entre si. Na decisão do credor para o provimento de capital, as informações contábeis foram menos relevantes na condição de risco informacional, enquanto, nas condições de maior risco de crédito, essas informações foram mais relevantes. / The relevance of accounting information lies in the ability of information affecting the decision-making of accounting users, due to the change of their expectations for the performance of entities. Investors and creditors make their decisions based on accounting with one common goal: the provision of capital. In this context, decisions of these users are the trading of companies\' assets or shares by investors, reflected in the stock price movements, and the granting of credit to the companies by creditors, reflected in the financing obtained by borrowers. Protection mechanisms adopted by these users (BURKART; GROMB; PANUZI AL, 1997; STRAHAN, 1999; BEBCHUK; KRAAKMAN; TRIANTIS, 2000; NIKOLAEV, 2010; ARMSTRONG; GUAY; WEBER, 2010) and their differing informational requirements (HEALY; PAPELU, 2001; BALL; ROBIN; SADKA, 2008; PEEK; CUIJPERS; BUIJINK, 2010), as well as the intrinsic function of VR models (value relevance) and CR models (credit relevance) brought the premise that accounting information used by these two economic agents are different in their decisions of capital provision. The relevant accounting data are largely highlighted for investors in the studies of VR (DEVALLE; ONALLI; MAGARINI, 2010; CLARKSON ET AL, 2011; TSALAVOUTAS; DIONYSIOU, 2014; BARTH et al., 2014; CLOULT; WILLETT, 2016). However, there is little evidence regarding accounting relevance for creditors (HOLTHAUSEN; WATTS, 2001; FLOROU; KOSI, 2015), since the credit market corresponds to a source of substantial resources for businesses (BEIRUTH, 2015; BEIRUTH et al., 2017). CR studies (HANN; LU; SUBRAMANYAM, 2007; KOSI; POPE; FLOROU, 2010; WU; ZHANG, 2014) attested that useful accounting information for the estimation of credit risk are relevant for creditors and impact the decision of the analysts of credit rating agencies. So, from the underlying premise that accounting information to creditors and investors are different, the general objective of this research was to verify if relevant accounting information is different for creditors and investors in their provision of capital decisions. The specific objectives were to identify whether accounting information are less relevant for creditors by loans in higher-risk informational condition (lowest enforcement) and if they are more relevant in situations of higher credit risk (greater leverage and low ranking of credit ratings). The analysis included companies from 25 countries in the period from 2010 to 2015, with the application of the VR model and of the proposed model to the creditor by loan (VCR). The results indicated that all information were relevant for investors, although not all were relevant for creditors. This evidence means that the decision models for these two groups are different from each other. In the creditor\'s decision of credit granting, accounting information were less relevant under informational risk condition, while under higher credit risk this information were more relevant.

This thesis studies the yield differential between green bonds and conventional bonds, the so called green premium or "greenium". By deriving a theoretical model that includes investors' preferences for green assets, two hypothesis are formulated: There exists a negative green bond premium and The negative premium is larger in absolute terms in countries with high environmental performance. In order to estimate the premium, synthetic conventional bonds are constructed having the same characteristics as the green bonds. Two different matching methods are used to construct the synthetic bonds, one based on maturity and one based on correlation. The findings of this study suggest a significant negative green premium between -0.29 and -0.78 basis points. Also, the green premium is more than twice as large, in terms of absolute value, if the issuer is based in a country which has a high environmental performance.

The objective of this dissertation is to investigate the impact of important market participants such as Mutual Funds, Hedge Funds and the Federal Reserve Bank on the equilibrium equity premium, risk free rate and asset volatility and to analyze the effect of these institutions on risk shifting, portfolio allocation and financial stability. Specific features of institutional investors and central banks as well as their role in financial markets are reviewed and analyzed in Chapter 1. In Chapter 2, it is shown that the competitive pressure to beat a benchmark may induce institutional trading behavior that exposes retail investors to tail risk. In our model, institutional investors are different from a retail investor because they derive higher utility when they outperform the benchmark. This forces institutions to take on leverage to over-invest in the benchmark. Institutions execute fire sales when the benchmark asset experiences negative shocks. This behavior increases market volatility, raising the tail risk exposure of the retail investor. Nevertheless, ex-post, tail risk is only short lived, all investors survive in the long run under standard conditions, and the most patient investor dominates in the sense that she has the highest consumption wealth ratio. Ex-ante, however, benchmarking is welfare reducing for the retail investor, and beneficial only to the impatient institutional investor. Chapter 3 presents an analysis on how monetary authorities seeking to stabilize inflation, output and smooth interest rates distort the term structure of interest rates and prices of risk relative to an economy where central authorities adjust the money supply without taking into consideration the slope of the yield curve. Closed-form expressions for all equilibrium quantities are presented and the impact of quantitative easing on prices, risk premium and volatility of financial markets instruments, such as stocks and bonds, are evaluated. The changes in macroeconomic variables such as consumption, money demand and investment policies are also investigated. Under the adopted parametrization, quantitative easing is welfare improving. In addition, quantitative easing increases nominal bond and equity volatility, while reducing both real and nominal bond yields for all maturities.

This dissertation contains five research projects within the context of two distinctive issues that concern the effectiveness of executive compensation in aligning executive interests with shareholders and how institutional investors play a role in structuring corporate governance mechanisms. The objective of this dissertation is to first determine how institutions should exert their influence if they are serious about alleviating agency problems and improving firm performance. Second, the thesis seeks to determine whether institutional investors use their influence to shape executive compensation and corporate governance mechanisms in a manner consistent with aligning managerial interests with shareholders and increasing shareholder wealth. The thesis finds that CEOs with option incentives increase the likelihood that a firm will increase risk by undertaking both major real investments and acquisitions. Moreover, CEO option grants are positively related to measures of firm valuation and operating performance suggesting option incentives are an important mechanism to align CEO interests with shareholders. This is robust to alternative measures of firm valuation and operating performance, also various estimation techniques. Using these findings to motivate the direction of institutional influence on executive compensation, it is found that institutional investors, particularly smaller activist traders, significantly increase option grant incentives received by executives. Institutional influence also raises CEO pay which is consistent with preservation of reservation CEO utility levels. Addressing the role of institutional investors in the context of other corporate governance mechanisms, it is found that institutional investor influence is also negatively related to board size and positively related to board independence, which is achieved by removal of inside directors. Such actions are consistent with empirical studies that show smaller boards and increased levels of independent directors improve firm performance and board decision making. The main conclusion from this dissertation is that option incentives are an effective mechanism to align CEO interests with those of shareholders. Institutional investors appear to recognise this importance, and effectively use their influence to increase options received by executives. Combined with institutional investors putting in place corporate boards that provide better oversight of management, institutional investors appear to be effective monitors of the firms in which they invest.

The recent proposal by the Group of Four Plus One to modify the accounting treatment of operating leases has attracted considerable comment. However, a review of the publicly available submissions to this proposal reveals that no one has addressed the issue in terms of the primary objective of general purpose financial reports, that is, to provide decision useful information to non-professional investors. This thesis seeks to redress this gap by providing some evidence of the ability of nonprofessional investors to evaluate operating leases as they are presented according to current accounting standards and alternative presentation formats. The thesis reports the results of an experiment carried out on surrogates for nonprofessional investors. The main finding is that the vast majority of subjects were unable to evaluate operating lease information when it was disclosed in the notes, rather than reported in the body of the Statement of Financial Position. Subjects consistently relied on reported figures and seemed unable to incorporate information presented in the notes to the financial reports, even when the links between the notes and the reported figures were made more obvious than is currently the case. The finding has a number of implications. It would appear that the existing accounting treatment of operating leases is the source of a structural information asymmetry, as a substantial proportion of users were unable to evaluate information relating to operating leases. This information asymmetry should be removed for reasons of economic efficiency. The recent withdrawal by non-professional investors from equity markets shows that non-professional investors will react strongly if they start to doubt the ability of general-purpose financial reports to provide them with decision useful information.

<p>Investors in the financial market are supposed to hold diversified portfolios to minimize their risk adjusted for expected return. However, several researchers have pointed out that most investors are over weighted in their home market. This means that most diversification happens in terms of choosing stocks in the home market which means that further possible diversification through international diversification is unused. One can therefore expect that foreign investors have preferences for securities with specific characteristics once they go abroad. An earlier study of the Swedish stock market over the years 1993-1997 has shown that foreign investors, in greater extent than domestic investors, have a preference for large firms, firms paying low dividend and firms with low leverage. With the steep up-turn of the Swedish stock market before the millennium and the down-turn in year 2000 in mind, this study examine whether the investment patterns between 1996 and 2005 are consistent with the results of earlier investigations. In general the results are consistent with earlier investigations. However, this study also shows that foreign investors seem to be more interested in choosing securities with relatively high fundamental value and lower level of leverage during market down-turns.</p>