Agency theory suggests that institutional stockholders are able to influence the dividend policies of listed firms with the underlying objective of reducing a firm’s agency costs. This study explores the causal effects of institutional ownership on dividend policies for the firms listed in China. Using various measures of institutional ownership and dividend policy, I find that mutual fund ownership in a firm causes it to pay out more cash dividends or to initiate cash dividends. These effects are mainly evident in the firms controlled by the state and regional governments and those with relatively high free cash flows. The effects are also shown to be stronger when the mutual fund investment horizon is longer. However, firms with existing high levels of cash dividends do not attract mutual fund investors. The results still hold when I use different methods to mitigate the endogeneity problem. Mutual fund ownership is also shown to reduce agency costs and improve the operating performances of the firms that they invest in. Other institutional investors, such as banks, insurance companies, and securities companies appear to have different influences from those of mutual funds on firms’ cash dividend payments, agency costs and operating performances. My results support the agency costs explanation of institutional ownership and dividend policy.

The adverse selection and agency cost theories suggest that the informational transparency of a firm can help to reduce over- or under-investment. This thesis examines how information asymmetry influences firm-level investment efficiency for companies listed in the U.S. market from 1993 to 2009. Information asymmetry is measured by the dispersion and error of the earnings forecasts made by financial analysts. I investigate how information asymmetry affects firms’ proneness to overor under-invest and the firms’ deviations from the investment levels predicted by investment opportunities. To be consistent with the prior literature, I also use the volatility of daily stock returns and yearly high-low price spreads derived from daily stock trading as alternative proxies of information asymmetry. The results show that lower information asymmetry is associated with more efficient investment. Specifically, a good information environment reduces capital investment for firms that are more prone to over-invest and increases capital investment for those that are more prone to under-invest. In addition, lower information asymmetry is also negatively associated with firm investment when the firm is over-investing and is positively associated with firm investment when the firm is under-investing The results are robust across different regression methodologies and to different estimates of the variables. My findings are consistent with the agency theories of adverse selection and principal-agent conflict.

My thesis examines whether corporate accessibility for minority shareholders, defined as the ease with which minority shareholders are able to contact corporate insiders, can be a signal of the severity of a firm’s agency problems. Using Chinese public listed firms as the testing group, I find that accessible firms are associated with less serious agency problems than is the case for non-accessible firms. Specifically, accessible firms tend to be associated with lower agency costs, lower cost of equity, higher firm valuation, and better operating performance. I also find that accessibility can signal agency problems in firms with different ownership and corporate governance structures, though the signaling effects are weaker in the firms where the incentives of insiders are tied less closely to stock price performance. Overall, my results indicate that corporate accessibility for minority shareholders is a value-relevant signal for investors to detect the quality of the publicly listed firms in China.

Using a dataset consisting of complete bid information for 477 bookbuilt IPOs that took place during Nov 2010 to Oct 2012 in China, I examine whether the performance of institutional investors demonstrates persistence in the IPO market. Building on the adverse selection model as developed by Rock (1986) and a twoperiod analysis, I develop three hypotheses and obtain empirical results that are consistent with the hypotheses. Firstly, I find that the performance of institutional investors continues into the next period. Secondly, I find that the performance persistence exists only for the investors with good past performance but not for investors with bad past performance. Finally, an index capturing the past performance of institutional investors is shown to be informative about the IPO’s initial and medium-term post-market returns. Overall, the results are consistent with the existence of performance persistence among the institutional investors. I conduct additional tests to trace the roots of the observed performance persistence. Results support the hypothesis that institutional investors with good past performance are relatively more informed than those with bad past performance. Specifically, investors with good past performance are more likely to participate in issues with high underpricing, exhibit stronger bid shaving ability, provide more information in terms of high elasticity of demand curve, and show a weaker tendency of naïve reinforcement learning. The results are robust after controlling for the influence of underwriters and after ruling out different alternative explanations. Taking all the results together, my study provides the first systematic evidence on the performance persistence of institutional investors in the IPO market. The results provide important insights for understanding the role of institutional investors in the IPO process and have implications for the design of IPO methods.

This study investigates both the direct and indirect roles of credit ratings (CR) on the capital structures of 1,513 firms operating in 19 countries with different financial orientations and levels of economic development over the 20-year period (1991-2010). Until recently, it has been common place to classify countries into capital market-based oriented (MB) and bank-based oriented (BB) in terms of their financial systems’ orientation (Antoniou et al. 2008). Traditionally, in MB economies (Australia, Canada, Hong Kong, South Korea, Mexico, the Netherlands, Sweden, Switzerland, Thailand, the U.K., and the U.S.) having a CR helps firms issue equity or bonds. In contrast, in BB economies (France, Germany, India, Indonesia, Italy, Japan, Russia, and Spain), companies tend to obtain loans from banks with which they maintain a long-term relationship. The creditworthiness of the firms is thus assessed by banks without much need for external CR. I find that the CRs’ impact on a capital structure is more significant and negative in countries with more MB oriented financial systems when quantified by the Financial Architecture variable (measuring the size, activity and efficiency of a stock market vis–à–vis the banking system of country annually), but not by the traditional division into MB and BB countries. This is consistent with the pecking order theory and information role of CRs in issuing equity, as well as the evidence of a rapid development of stock markets in many BB countries, which dulls the distinction between the traditionally defined MB and BB economies. Furthermore, the relation between the CRs and firms’ leverage ratio is significantly stronger for companies operating in advanced countries than companies operating in developing economies. Moreover, my analysis shows that CRs play more significant role in the U.S. than in other countries. In addition, I find that companies with poorer CRs display a faster speed of adjustment towards a desired level of gearing. This phenomenon takes place regardless of financial orientation or economic development of a country and can be linked with a different degree of financial constraints across differently rated firms.

It is well known that prudence plays an important role in the process of decision making under uncertainties. However, how prudence affects a bank's decision on extending fixed rate or variable rate loan has not yet been fully examined. In this dissertation, I use definition of second-order expectation dependence to further identify conditions for the risk prudent (imprudent) bank under state-dependent framework to refrain from extending fixed rate loans. Furthermore, using a set of actual data, I apply a recent developed inference procedure for testing positive expectation dependence to demonstrate the significance of my work in empirical applications. In the end, a non-parametric calibration is conducted and the result is highly consistent with the prevalence of banks that have preference for adjustable rate mortgage in U.S. 30-year prime mortgage market.

Since 2000, China has required publicly listed firms to issue management earnings forecasts when they expect extreme changes in earnings or are likely to become loss-making. This study examines managers’ forecast decisions under this unique regulatory environment. I find an increase over time in the proportion of firms issuing voluntary earnings forecasts when they do not expect extreme changes in their earnings or losses. I also find an improvement in the quality—in terms of the precision, accuracy and bias—of both mandatory and voluntary forecasts over time. Further detailed analysis shows that the introduction of the regulation on management earnings forecasts is one of the underlying forces driving firms’ decisions to provide voluntary earnings forecasts. Specifically, I find that a firm is more likely to issue a voluntary forecast if the firm was required by regulation to issue an earnings forecast in the previous year. Peer pressure also explains firms’ decisions to issue voluntary forecasts. I then investigate the reasons underlying the improvement in the quality of management earnings forecasts. I find that learning effects and peer pressure are the driving forces behind the improvement. Specifically, I find that the forecasts issued by more experienced firms are more specific, accurate and conservative. Furthermore, the quality of a firm’s forecast is positively related to the quality of its peer firms. Overall, my results show that requiring some listed firms to issue management earnings forecasts in China might have built up a momentum that has promoted the issuance of voluntary forecasts and improved the quality of forecasts over time.

The coexistence of tradable and non-tradable shares in Chinese firms has caused severe agency problems and has been the subject of much criticism. In 2005, the Chinese Securities Regulatory Commission launched a reform to eliminate the dual-class share structure and convert non-tradable shares into tradable shares. My thesis examines how the Split Share Structure Reform in China affects the level of information asymmetry of listed firms. The regression results show that the firm-level information asymmetry, measured by the probability of informed trading (PIN), is positively associated to the firm’s proportion of non-tradable shares before the reform, and the PIN decreases significantly after the reform. This is so because the reform reduces the agency costs of firms and increases stock market liquidity. I further document that the reform’s effects on PIN are more pronounced for the firms whose non-tradable shares are more likely to be traded after the reform, the firms that experience a significant enhancement in blockholders’ threat to exit and non-SOEs. The liquidity shock induced by the reform also increases the intensities of informed trading and uninformed trading in the market and the magnitudes of the influences are larger for the latter than the former. My thesis sheds light on the consequences of the reform of firm ownership structure in China and shows that reducing information asymmetry is a channel through which the reform helps improve firm performance. The results of my study provide policy implications for future reforms in developing financial markets.

Credit Default Swaps (CDSs) play an important role in the financial markets. The introduction of CDSs has impacts on the bond market, and the financial characteristics and creditworthiness of the underlying reference entities. When financing is not frictionless, the investment policies of firms are related to their financial conditions. However, whether or how the introduction of CDS will directly affect the investment policy of the firm has not been examined empirically in the literature. To shed light on this issue, my study investigates the relation between credit default swaps trading and corporate investment policy for the listed firms in the United States using the data of CDS reference entities from 2002 to 2014. I find that the introduction of CDSs is negatively related to the investment decisions of reference entities. Furthermore, the relation is more significant when the reference entities have financial constraints and depend more on external credit supply. Overall, when a listed firm becomes a CDS reference entity, the probability of its underinvestment will increase. The study contributes not only to the growing literature on the relationship between CDS introduction and the reference firm, but also to the literature on corporate investment policy making.

Based on a valuable testing venue in China where listed companies are required to disclose corporate site visit records of financial analyst to the public, this study examines whether analysts will learn from visiting analysts' forecasts that contain superior private information. I find that visiting forecasts tend to attract more analysts to issue forecasts in their aftermath than the prior forecasts issued by the same analysts but without conducting corporate site visit (non-visiting forecasts). The following effect is weaker when the visiting forecasts are more informative. In addition, other analysts’ forecasts following the visiting forecasts tend to move closer to the visiting forecasts than the forecasts following the non-visiting forecasts, with the effects being stronger for more informative visiting forecasts. Furthermore, followers experience a greater improvement in their forecast accuracy than the non-followers. This effect is also stronger when the visiting forecasts are more informative. Last but not the least, I find a decline in analyst forecast dispersion, an increase in common information, and an improvement in forecast accuracy in the period subsequent to the issuance of visiting analysts’ forecasts but no such effect for non-visiting forecasts. Collectively, the results suggest that analysts have incentive to learn from the forecasts that contain superior information and such learning activities tend to improve the information environment of the visiting firms.