My dissertation studies the evolution and role of short selling activity in financial markets. My first essay examines the cross-sectional and time-series variations in the characteristics of equity lending market in the setting of IPO, where, as suggested by Duffie et al. (2002), search frictions are likely to be high. I find that the initial supply of lendable shares and short interest levels increase with offer size, while initial lending fees decrease with offer size. The initial lending fees are also positively related to the bargaining power of lenders and negatively related to the bargaining power of borrowers. The supply of lendable shares and short interest level both increase following the IPO. The growth rate in short interest over time is negatively related to time since IPO. The increase in supply of lendable shares is positively related to the public float as well as the contemporaneous and lagged changes in institutional ownership, especially for institutional investors who engage in lending and short selling. Moreover, the supply of lendable shares increases as private equity firms and venture capital investors exit the stock and the share float increases. The increase in float is accompanied by a reduction in the cost of borrowing. IPOs with high lending fees tend to have low subsequent returns, which together with the rest of the findings, provide support for the ideas in Duffie et al. (2002) and highlight the importance of search frictions in equity lending market. Using detailed daily short interest data for U.S. common stocks over the period of 2006 to 2017, my second essay examines short selling activities around earnings announcements and their impact on stocks prices. Stocks with high short interest, large changes in short interest, more covered shorts, or more new short positions prior to earnings announcements have stronger price reactions to earnings news and much weaker post-earnings-announcement drifts (PEADs). Trades by short sellers during earnings announcements are consistent with the earnings surprises as well as announcement-period returns. However, these trades do not predict post-earnings-announcement drifts. The results suggest that on average short sellers do not actively trade on earnings-related iiinews or anomalies, but their information acquisition and trading activities help improve price discovery during earnings announcements.

In my first essay, I investigate the relationship between IPO long-run underperformance (Ritter, 1991) and the idiosyncratic risk puzzle (Ang, Hodrick, Xing and Zhang, 2006), the phenomenon of abnormally low returns for stocks with high idiosyncratic risk. I show that IPO long-run underperformance is in fact a manifestation of the surprisingly low returns for high idiosyncratic risk stocks. IPO underperformance disappears after I control for the idiosyncratic risk. Specifically, the underperformance of IPO firms only presents following the months in which they are classified into the highest idiosyncratic risk quintile. On the other hand, I find that the idiosyncratic risk puzzle is magnified by the IPO underperformance for two reasons. First, IPOs are over-represented in the highest volatility quintile. Second, while stocks in the highest volatility quintile underperform in general, the intra-quintile underperformance is substantially more severe for the IPO firms. My results are robust to different sample requirements. My second essay examines school quality and quality risk capitalization when school quality is uncertain, taking into account uncertainty induced by low signal content in quality measures available to parents or stochastic quality outcomes. Extending the residential bid rent theory to the uncertainty environment, the theory shows that greater school quality increases housing prices steepens the price gradient, whereas the quality risk decreases the housing prices and flattens the price gradient. The empirical models incorporate two sources of quality risk, the variance in measured school quality and school attendance zone instability. Coupling an output based measure using the over-period average of school normalized math test scores based on the Orange County public elementary school average scores with an input based measure using student/teacher ratios provides quality measures that appear to correlate sufficiently with parents' perceptions of elementary school quality, but school peer effects play important role as well. Estimates reveal capitalization of quality and uncertainty that are consistent with theory as well as systematic patterns across housing market phases and neighborhood in income level. My third essay is a meta-analysis of the body of empirical results for school quality capitalization in house prices. One puzzling aspect of the housing markets literature is that, while public school quality is a major concern of many households, empirical studies of school quality capitalization into house prices yield mixed and sometimes inconsistent results not only across studies, but also within studies when using different school quality measures and models. These differences are reflected in the capitalization coefficient value, level of significance, and even direction of capitalization effects. This paper conducts meta-analysis of the school quality capitalization estimates to identify the factors contributing to this variation. It reveals that the way the school quality is measured matters. Peer effects measures yield less significant capitalization estimates than input and output based measures and value added measures exhibit lower significance than other output based measures. Moreover, both boundary fixed effects and neighborhood fixed effect approaches can effectively and significantly control for the influence of neighborhood amenities. Adding more school quality variables reduces the capitalization significance of individual school quality variables. The most unexpected finding is that school quality capitalization significance is much less in the South than in other regions. Also surprising is that econometric methods do not appear to be driving results.

My first essay examines compensation of newly formed boards of directors following tax-free corporate spin-offs. The empirical results show newly formed spin-off boards are paid significantly more than peer boards in the same industry with similar firm size. Higher compensation is observed for spin-off firms where the CEOs are not formerly employed by the parent firms but not for spin-off firms with parent related CEOs, indicating that new directors demand higher compensation for the work involved in setting up the new governing system for the spun-off firms especially when there is a brand new CEO managing the spinoff firm. Differences in the structure of director compensation are consistent with better incentive alignment for the newly formed spinoff boards who have the rare opportunity to design their compensation from scratch. The paper also finds evidence that limited CEO's influence on the composition of the spinoff board leads to weaker cronyism between the board and the CEO of spinoff firms. My second essay explores the role CEO gender plays in shaping the board of directors. The literature provides strong evidence that male CEOs are more overconfident than female CEOs. I contend that a male CEO, who may overestimate his ability and/or underestimate the monitoring role of the board, will prefer to exert as much control over the board as possible and thus prefer a weaker board. I find consistent results that new male CEOs are more likely to increase board size, decrease board independence, reduce board gender diversification, have worse director attendance and have lower overall board monitoring. In contrast, new female CEOs have more gender diversified boards and are associated with an increase in overall board monitoring intensity. I also find supporting evidence in terms of CEO compensation, where new male CEOs gain more control and are compensated more in both total compensation and equity compensation post transition, consistent with what we expect from a weaker board. My third essay examines CEO's influence on the board of directors in spinoff firms. CEO's influence on the board of directors has been the main concern for shareholders who entrust the firm board with the task of monitoring the firm CEOs. Current literature shows that the more powerful the CEO, the better he is able to extract rents via his compensation at the expense of shareholders. In this study, I utilize a sample of spinoff firms that need to form a brand new board of directors from scratch to shed more lights on the CEO influence question. Particularly, I hypothesize and find that since spinoff CEOs appointed from the parent firm have more influence over the selection of spinoff directors, they enjoy higher compensation with lower pay-performance sensitivity (PPS) and have lower turnover-performance sensitivity than CEOs at similar non-spinoff firms. In contrast, spinoff CEOs hired from outside the pre-spinoff business have similar compensation, PPS and turnover-performance sensitivity to their peers. The results provide supporting evidence for the CEO influence hypothesis and show that limiting CEO's involvement in the selection of directors might help mitigate subsequent CEO rent seeking behavior.

My first essay examines the degree to which the market prices of publicly traded firms reflect and respond to new information regarding the economic viability and vitality of organizations to which they are strategically linked. More specifically, I exploit the uniquely transparent nature of the lessor-lessee relationship across commercial real estate markets to evaluate whether future returns to real estate investment trusts (REITs) are systematically affected by the financial return performance and/or operational opacity of the tenants who lease their investment properties. Using a hand collected data set identifying the principal tenants of 96 publicly traded REITs, I find those firms with the best performing tenants generate annualized abnormal returns which are approximately six percent higher than those realized by REITs with the worst performing tenants. These results are robust to a variety of model specifications, and a closer inspection of the results reveals these performance differentials are consistent with emerging evidence across the literature suggesting investors' limited attention materially influences the return predictability of assets. With respect to the current investigation, I thus conclude investors' limited attention leads to the failure of REIT prices to fully reflect the valuation implications of their tenants' return performance. My second essay investigates how sophisticated investors, such as short sellers, trade on information along the supply chain. Short sellers are known to be generally better informed than common investors. Given the economic linkages that exist between the suppliers and customers, one would expect short sellers to trade on such information. My results indicate that short interest predicts unexpected earnings news, consistent with short sellers extracting information from economic relationships. When I evaluate stock return and short interests in regression analysis, I find strong negative relation between short interest in supplier firm and the future stock returns for the customer firm for the return in the next month. The negative relation persists for twelve months. I find similar results from portfolio approach. I argue that one plausible channel that explains the information content of supplier (customer) firm's short interest for the customer (supplier) firms is short sale constraints on the customer (supplier) firms. My results are consistent with this explanation. Overall, my findings suggest that short sellers play an important role in the price discovery of related firms on supply chain, beyond their direct effects documented previously.

New teachers are facing lower pay and less generous retirement benefits than the prior generation, yet their financial and retirement knowledge, concerns, and preferences have received little attention. To investigate these areas, the author developed a 39-item survey instrument and administered it to 314 preservice teachers in undergraduate teacher education courses at the University of Central Florida, who were primarily female elementary and early childhood education juniors and seniors ages 18–25. Florida public employees are offered an unusual choice between a traditional pension plan and a defined-contribution plan similar to a 401(k) in which they can select their own investments, and 54% of surveyed preservice teachers preferred the 401(k)-like plan structure. However, their preferences may be ill-advised, given that in a mock portfolio allocation exercise intended to assess retirement investing sophistication, preservice teachers directed more than half their retirement money to low-risk money market and bond funds, which will likely underperform stocks over several decades. Furthermore, they anticipated that low salaries will impede their ability to save for retirement. For comparison, the survey was also administered to 205 U.S. college students or graduates ages 18–25 on the Amazon Mechanical Turk platform for $1.00 each. Worrisomely, preservice teachers had significantly lower financial knowledge and retirement investing sophistication. These findings suggest a need for financial education targeting Florida preservice teachers, particularly given that the Florida Retirement System substantially cut its benefits in 2011.

In my first essay, I use additions to the S&P 500 index as a laboratory to investigate how the interaction between arbitrageurs and arbitrage risk affects security prices. I find that the price effect is strong when there is high arbitrage risk (as measured by the lack of close substitutes) and low presence of arbitrageurs (as measured by low ownership by active institutions). Furthermore, a strong presence of arbitrageurs moderates the effect of arbitrage risk on the post-addition price reaction of added stocks. I also find a significant decrease in arbitrageurs' ownership in the added stocks post addition. More importantly, this decrease is accompanied by a significant increase in arbitrageurs' ownership in the added stocks' close substitutes. My second essay examines the sensitivity of investments to changes in investment opportunities for diversified and for single-segment firms. Because many concerns have been raised about existing proxies of investment opportunities, I introduce and examine the empirical performance of a new proxy based on financial analysts' earnings forecasts. The findings are consistent with the idea that firms respond efficiently to changes in investment opportunities. I find that firms increase (decrease) their capital expenditures when there is a favorable (unfavorable) change in opportunities. In addition, I find that diversified firms are more sensitive to changes in investment opportunities than are single-segment firms and that much of the difference in investment behavior between the two types of firms is explained by changes in investment opportunities. My findings are consistent with the idea that, when compared to single-segment firms, diversified firms use their larger internal capital markets and enjoy a less constrained response to changes in investment opportunities. The overall findings are in contrast to existing evidence that diversified firms allocate resources inefficiently. In my third essay, I investigate how the diversification discount depends on internal and external governance control mechanisms. The study uses CEO power to measure internal control and institutional ownership to measure external control. I find that CEO power has a negative effect on firm value and that this effect is greater for diversified firms. I also find that while institutional ownership is positively related to the value of single-segment firms it is not significantly related to the value of multi-segment firms. The overall findings that the diversification discount is more pronounced for firms with weaker internal and external governance control mechanisms support the hypothesis that governance control mechanisms are less effective in diversified firms than in single-segment firms.

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