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Abstract The recent financial crisis, sparked as a result of the subprime market in the United States, is regarded by many researchers as the most severe financial crisis to happen since the Great Depression. This crisis has raised the important issue of the spill-over effect of the financial crisis into other sectors of the economy. However, evidence of the effect on firms' behaviour with respect to their financing and investment decisions is limited, and the existing research has mainly concentrated on the publicly listed firms in the US. It is also evident from the findings of existing published studies that the majority of studies do not reach a unanimous conclusion (Alien and Carletti 2008; Bakke 2009; Duchin, Ozbas and Sensoy 2010; Leary 2009; Lemmon and Roberts 2010; Lin and Paravisini 2010 a). Further, the focus of the majority of the existing studies is very narrow with respect to the components of capital structure. As a result, it is not clear from the existing literature which component of the capital structure is more sensitive to credit supply contractions than any other. Moreover, accounting regulations, financial reporting requirements and institutional features are different between the US and the UK, which high!(gl1Js the need for more research in this area. In addition, no systematic investigation into the financing and investment decisions of private firms during the crisis has ever taken place in the UK. The main purpose of this study is, therefore, to investigate the financial and investment decisions of both private and public listed finns during the time of the recent financial crisis in the UK. More specifically, this study investigates whether shocks to the supply of credit affect firms' leverage and determines which components of capital structure are affected by credit supply contractions. Further, the study investigates how firms manage their finances during a crisis period. In other words, how firms minimize the effect of credit contractions by resorting to alternative sources of finance such as internal funds, net debt issues, net trade credits and net equity issues. The study also examines whether firms manage their dividend payouts to maintain their financial slack. Finally, the study investigates the effect of the credit crisis on firms' performance and investment decisions. To investigate these issues, the study adopts a comprehensive strategy which consists of three elements, namely, identification of exogenous credit crisis, the use of film fixed effects model and the use of firm level control variables. Data for the analysis are extracted from the FAME and the Datastream databases for the period 2004-2009. A total of 4973 private firms are extracted from the FAME database and 2039 public firms are extracted from the Datastream database. The fixed effects analyses highlight that the financial crisis has adversely affected the total debt ratios of both types of firms. This effect is most significant on the short-term financing channel (such as short-term debt and trade credit) in the sample of private firms; while it is the trade credit channel that is negatively affected by the credit crisis in the sample of public firms. The effect on long-term and short-term debt is statistically insignificant in the sample of public firms. There are also differences in the way both types of firm responded to the credit crisis. Private firms, for example, issued more equity and held cash in response to the credit shortage. These firms do not move to net debt issues and net trade credits; nor do they adjust their dividend payout policies during the crisis period. The results further reveal that public firms use more internal funding and repurchase equity in response to the credit drought. These firms also reduced dividend payout to preserve their financial slack. In addition, public firms do not change to net debt issues and net trade credits in response to the credit supply shocks. Moreover, the results reveal that the performance and investment of both types of firm are adversely affected by the credit crisis. This highlights that the inability to obtain external credit and the relative lack of substitution towards alternative sources of finance have negatively affected the performance and investment of both types of firm. Further, in the private firms' sample, the increase in cash holdings and decline in investment suggest that funds raised through the equity issue may have been used to fmance the cash holdings of these firms. In the public firms' sample, decrease in cash reserve, dividend payout and investment in tangible assets suggests that internal funds may have been used to fmance the equity repurchases. Overall, the results suggest that financial and investment policies of private and public firms are sensitive to the credit supply shocks. 11

One of the principal questions in financial economics and applied finance relates to the optimal allocation of capital assets to portfolios. In recent times this field has received renewed attention as traditional portfolio optimisation methods were found to inadequately capture the nongaussian and interdependent nature of the returns of capital assets. A particular case is that of infrastructure assets, which exhibits particularly nongaussian and interdependent returns. In this thesis we introduce a portfolio choice method developed for nongaussian and interdependent assets and for longer investment horizons, as is common to infrastructure investment. Starting from the classical financial economic assumption of an expected utility maximizing investor, we derive an analytical solution, which incorporates all higher moments of the assets’ distributions without making limiting assumptions to ensure solvability. Rather than imposing subjective probability beliefs to infer the return’s distributions, we employ Independent Component Analysis to perform a decomposition of the asset space. In this way we are able to identify the fundamental drivers of the returns data and base our portfolio selection on their nature and interdependence. We apply the method on two samples of infrastructure assets. Firstly, we consider global infrastructure indexes. Secondly, we consider a large sample of airport operators, an asset class of particular interest to this thesis. In both cases we show how the method will outperform its principal rival and contestant, the standard mean-variance optimised portfolio. The thesis concludes by showing how the method also allows for a redefinition of the concept of diversification, fully integrated with the portfolio choice method. The thesis therefore contributes to the current state of the art and might lead to further research and discussion regarding the possible use of techniques like Independent Component Analysis to solve longstanding questions in theoretical and applied finance.

The objective of this thesis is to consider some extensions of the CAPM and to investigate whether such extensions can offer a better explanation for the US average equity returns. This thesis focuses on four main extensions: (i) time-varying factor loadings; (ii) higher moments (coskewness and cokurtosis); (iii) time-varying risk premia,; and (iv) conditional versions of the CAPM using individual assets. Time-series and cross-sectional tests, conducted on portfolios sorted on market capitalization and/or the book-to-market ratio, show no evidence in support of CAPM. While the standard CAPM predicts that the risk premium should be positive and the intercept from a regression of expected returns on beta should be insignificant, the empirical evidence from the relatively simple models goes contrary to expectation. The use of time-varying betas with dynamic conditional correlations improves the performance of the CAPM, but does not confirm its validity. The introduction coskewness and cokurtosis does not rescue the CAPM. In particular, the unconditional four-moment CAPM is rejected as coskewness and cokurtosis are not found to have additional explanatory power for the cross-section of returns of portfolios of stocks sorted on market capitalization and book-to-market. The conditional four-moment CAPM where coskewness and cokurtosis are obtained as counterparts of the covariance using dynamic conditional correlation is also rejected. Time-varying risk premia, based on simple bull and bear regimes, combined with the conditional CAPM and the conditional four-moment CAPM, lead to interesting results. In particular, the hypothesis of time-varying risk premia is never rejected, and the conditional CAPM produces a positive beta premium. The conditional CAPM and conditional four-moment CAPM are tested on individual assets. The results support the CAPM for individual stocks over the last 30 years. The four-moment CAPM seems to work especially well when the SMB factor is added to the model. All of the factors have the expected sign: beta demands a positive premium, coskewness a negative premium and cokurtosis a positive premium. Interestingly, SMB retains significance and has a positive risk premium. Small stocks tend to earn higher returns even after accounting for the comoments.

Given the economic importance of distressed firms, this thesis was motivated by an apparent lack of financial economic research examining distressed firms and their securities. The thesis principally focuses on the following two areas: (1) the costs of Chapter 11, and (2) the financial performance of low-grade bonds (i.e., "risky debt"). In addition, the laws and regulations affecting distressed firms are reviewed. Therefore, the main contributions of this thesis are empirical in nature. Regarding the costs of Chapter 11, the evidence presented suggests that they are large. Specifically, the costs of "successful" Chapter 11 are found to be an increasing function of firm size up to a point (i.e., they are a declining function for the very largest firms). Therefore, these findings contrast with previous studies which have found economies of scale for the administrative costs of bankruptcy. This has important implications for capital structure theories which trade-off the costs of bankruptcy with the tax shield advantage of debt over equity. In addition, generally larger costs are found than were found in previous research. Regarding the financial performance of low-grade bonds, the evidence presented suggests that risky debt valuation models which incorporate interest rate risk, in addition to default risk, best describe the return generation process for the three risky bond asset classes examined. The evidence for low-grade corporate bonds, low-grade municipal bonds, and convertible corporate bonds strongly supports this hypothesis. In addition, the evidence examined would suggest that the interaction between the various embedded options in risky debt should be an important element in any risky debt valuation model. Therefore, at a very broad level the thesis has the following two arguments: (1) bankruptcy is very costly; and (2) risky debt displays a return generation process which is very complex. The evidence presented strongly supports both theses.

Behavioural Finance, Options Markets and Financial Crashes: Application to the UK Market 1998-2010 By Ian Alan Whitfield Abstract This thesis examines the relationship between behavioural finance and options markets. Particular focus is on the analysis of option prices, implied volatility and trading activity which in turn provides insights into predictability, momentum and overreaction. The thesis is contextualised by a general to specific evaluation of the literature that forms the basis of the behavioural finance paradigm. The review is extended to analyse the extent to which support for the behavioural finance approach has been produced by research on options. Behavioural finance retains an element of controversy as it runs counter to a key pillar of neoclassical finance, the efficient markets hypothesis. Hence the onus is on researchers in this field to produce evidence that refutes the notion of market efficiency and to build models with testable implications that are better able to capture the mechanics of financial markets. This thesis is motivated by a desire to investigate, in detail, key aspects of human behaviour and to test whether they are particularly apparent in options markets. It is important to study the information which can be extracted from options data and to analyse whether this has any predictive power for spot prices. By extension, it is of further interest to examine whether movements in spot prices exert influence on option prices. In particular, aspects of options that capture human behaviour such as pricing of puts relative to calls, implied volatility, trading volume and open interest. The topical relevance of the work is highlighted by thorough application to the UK market during two recent periods of intense financial turbulence; the bursting of the dotcom bubble in 2001 and the liquidity/banking crisis of 2007/8. The empirical work examines the pricing of exchange-traded options relative to theoretical values, the forecasting performance of implied volatility indexes, the ability of trading volume and open interest to capture behavioural aspects of trading behaviour, and momentum and overreaction effects. Hence the work provides a unique and thorough investigation into behavioural finance and options markets in the UK. Results indicate an important role for investor sentiment although they do not necessarily indicate exploitable inefficiencies.

Equity entry modes are increasingly important regarding the internationalisation agenda of high-tech SMEs (HTSMEs). However, the fields of international business, international entrepreneurship and strategic management have not been able to provide or identify a specific theory or framework, which is able to explain the relevant factors related to the asset-exploiting and asset-augmenting FDI of HTSMEs. Therefore, in light of the absence of a specified analytical approach to the FDI of HTSMEs, the aim of this study was to test whether the new envelope paradigm framework, which additionally accounts for dynamic knowledge related factors and strategic asset seeking FDI, can serve as an analytical tool to explain the different types of FDI of HTSMEs. This study employed a cross sectional research design and conducted an email survey. The survey was based on an authoritative federal database, which was extended by the researcher into a state of the art tailor made census database of German nanotech and biotech SMEs. The firm- and location-specific variables in the conceptual framework were adopted and adapted from related studies. The results indicate that the envelope paradigm framework is able to explain the asset-augmenting FDI of HTSMEs. The relevant knowledge related firm-specific advantages (O-advantages) are the absorptive capacity and the internal knowledge network of the HTSME. Important knowledge related location advantages (L-advantages) are highly skilled workforce, innovative public and private scientific institutions and industrial concentrations. In terms of the asset-exploiting FDI of HTSMEs, the framework was able to determine relevant O-advantages such as scale economies and the internal support structure of the HTSME. However, the framework was not able to identify important L-advantages for the asset-exploiting FDI of HTSMEs. Overall, the findings imply that the envelope paradigm framework can serve as an analytical tool for understanding a substantial amount of the asset-exploiting and asset-augmenting FDI of HTSMEs. It provides a comprehensive picture of the structure and composition of HTSMEs that engage in the different types of FDI. The results contribute to the interdisciplinary debate on the compatibility and suitability of an IB framework in an entrepreneurial context. Furthermore, this study can assist HTSME managers in effectively configuring FDI strategies according to firm-specific abilities and location specific attributes. Policy makers could use this study in designing policies and support schemes to the specific requirements of this new type of HTSME. In a wider context, the findings bare relevant implications beyond the context of nanotech and biotech industries and the country context of Germany. It provides valuable insights for the group of coordinated market economies such as Germany and for other high high-tech industries, which increasingly define the future of mature industrialised economies.

This thesis contributes to social studies of finance and accounting (Vollmer, Mennicken, & Preda, 2009) and the practice theory literatures (Feldman & Orlikowski, 2011) by experimenting (Baxter & Chua, 2008) with concepts developed by Theodore Schatzki and demonstrating their relevance and usefulness in theorizing and explaining accounting and other organizational phenomena. Influenced by Schatzki, I have undertaken a sociological investigation of the practices, arrangements, and nexuses forming (part of) the social ‘site’ of private equity (PE). I have examined and explained the organization of practices within the PE industry. More specifically, I have sought to throw light on the practice organizations animating various PE practices. I have problematized a particular aspect of Schatzki’s practice organization framework: ‘general understanding’, which has so far been poorly understood and taken for granted in the accounting literature. I have tried to further explore the concept to clarify important definitional issues surrounding its empirical application. In investigating the forms of accounting and control practices in PE firms and how they link with other practices forming part of the ‘site’, I have sought to explain how the ‘situated functionality’ of accounting is ‘prefigured’ by its ‘dispersed’ nature. In doing so, this thesis addresses the recent calls for research on accounting and control practices within financial services firms. This thesis contributes to the social studies of finance and accounting literature also by opening the blackbox of investment [e]valuation practices prevalent in the PE industry. I theorize the due diligence of PE funds as a complex of linked calculative practices and bring to fore the important aspects of ‘practical intelligibility’ of the investment professionals undertaking investment evaluation. I also identify and differentiate the ‘causal’ and ‘prefigurational’ relations between investment evaluation practices and the material entities ‘constituting’ those practices. Moreover, I demonstrate the role of practice memory in those practices. Finally, the thesis also contributes to the practice theory literature by identifying and attempting to clarify and/or improve the poorly defined and/or underdeveloped concepts of Schatzki’s ‘site’ ontology framework.

Despite the well documented benefits of equity style investing in today’s financial markets, the academic view of the underlying cause for such benefits remains an ongoing debate. A number of theories have been proposed to explain why some asset classes earn better returns than others do under the same economic regimes. Rational finance links the outperformance of some stock groups to the equity characteristics that proxy for the common risk factors, behavioural finance, however, argues that mispricing resulting from irrational investor’s sentiment to fundamentals plays a key role. Meanwhile, a variety of business cycle variables have also suggested to contain information useful in explaining the expected stock returns. The observed style returns change all the time with predictable time-varying components, reflecting the structural and cyclical shocks to the macroeconomy. Motivated by the current ongoing controversy of anomaly versus risk compensation over interpreting equity style premiums, this thesis investigates how firm characteristics and business cycle conditions function separately to affect the style return dynamics based on the size and value-growth categorisations. It adds to the extant literature by explicitly examining the relative importance of the common risk factors versus firm-specific information as driving sources in the divergent equity style returns in the U.K. market. By identifying the dominant driving force that determines the relative style performance, it provides a further dimension to the current debate regarding the sources of style premiums and offers the choice of corresponding style investing strategies. The divergent style returns and its time-varying nature offer astute investors the opportunity to implement active style management to enhance portfolio returns. Motivated by the benefits of capitalising on such style return cyclicality and in particular the availability and popularity of Exchange Traded Funds based on market segments in leading financial markets as investment vehicle that offers low cost and high liquidity, this thesis examines a dynamic long-short tactical trading strategy by applying a binomial approach to focus on the rotation between pairs of equity styles. By answering key questions of whether equity style cycles exist in the U.K. market and whether the return dynamics of such style momentum strategy is distinct from the price and industry momentum effects, it contributes to the literature by providing valuable empirical evidence to compare with other studies in different economic and institutional environments. In response to the increasing popularity of using macro information to aid optimal style selection for the quant circles in the investment community, building on the methodology of Brandt and Santa-Clara (2006), this thesis approximates a solution of a mean-variance multi-style investor’s optimal style investing problem incorporating the business cycle predictability. This approach is parsimonious as the optimal style weights are parameterised directly on a set of pervasive business cycle predictors. By exploring how the distributions of the expected style returns and the location or the shape of the optimal style allocations are affected by given shocks to the business cycles, this thesis contributes to the extant literature by demonstrating the transmission mechanism of how business cycle volatility affects equity style return volatility and in turn a mean-variance investor’s optimal style allocation.

The 1980s has given rise to a new area of Finance, namely Behavioral Finance, which challenged the so far dominance of the Neoclassical Finance. Particularly, this new area introduced concepts from cognitive psychology in order to explain investors’ behavior at the collective level. Two of the most known faucets of collective investors’ behavior are herding and feedback trading. The first one is the phenomenon where investors copy the actions of the other investors, often disregarding their own beliefs, whereas the second one involves the chase of trends on behalf of the investors. Our thesis first examines the relationship between style investing and institutional herding under the context of a concentrated market. Style investing has been found to promote herding in numerous studies; however, given that these studies have been carried out in large markets, there has not been examined what is the impact of market concentration over this relationship, as a concentrated market may produce different trading dynamics than those in large markets. What is next is to examine the impact of the introduction of the Exchanged Traded Funds over noise trading; these relatively new financial products have special characteristics that can make them appealing to the investors and they could positively contribute towards markets’ completion. Finally, our research focuses on the issue whether institutional investors herd intentionally at the industry level; this issue has never been explored, to our knowledge, before and we will try examine this by using the interaction of institutional herding with various market and sector conditions. As a result, our research makes a contribution to the research on herding and feedback trading, examining important issues that have not been addressed before.