This thesis comprises three empirical studies that investigate the impact of bidders’ social linkages with politicians and financial advisors on merger behaviour, M and A deal characteristics and takeover returns. The resource based theory postulates that politically connected firms have competitive advantage over the unconnected firms in terms of privileged access to resources and relaxed regulatory standard. Federal regulatory agencies apply relaxed standards when reviewing merger proposals initiated by politically connected bidders. Whereas, the private interest theory states that politicians extract rents from their connected firms. Politically connected firms might encourage to undertake acquisition to protect their political interest. These contrast theories motivate the empirical investigation as to whether or not the bidders’ ties with the politicians affect the M and A process and its outcome. Chapter 3 looks at bidders’ social linkages with politicians and investigates merger frequency, M and A deal size and other characteristics of takeover deals initiated by politically connected bidders in the USA. It is found that politically connected bidders in the USA have a high likelihood of undertaking multiple acquisitions and targeting public firms. It appears that politically tied bidders do not prefer cash to finance merger deals. The evidence further shows that mergers in unrelated industries and large takeover deals are not associated with politically connected bidders. The overall findings suggest that the acquisition behaviour of politically connected bidders in the USA is influenced by the bidder’s self-interest of market and corporate control. Chapter 4 examines the bidder’s gain in acquisitions undertaken by politically connected bidders in the USA. It is noted that politically connected bidders in the USA underperform as compared to their counterparts. The results further show that politically connected bidders experience worse post-merger returns in the long-term as compared to non-politically connected bidders. Even after controlling self-selection bias through propensity score matching, politically connected bidders experience negative merger returns as compared to matched sample of non-political bidders. The “private interest theory” doesn’t explain the underperformance of politically connected bidders as the USA is a well governed economy and it’s not easy for politicians to extract personal benefits from their connected firms to the detriment of shareholders. Further, three hypotheses have tested to explore the reason(s) for the underperformance of politically connected bidders in the USA. No significant evidence is found for the free cash flow and financial constraint hypothesis, which implies that underperformance of politically connected bidders is not due to their easy access to the capital market. The empirical evidence suggests that after controlling bidder size, the underperformance of politically connected bidders disappear. It implies that politically connected bidders’ underperformance in both the short run and long run can be explained to an extent by the implications of a bidder’s large corporate size. It suggests that politically connected bidders in the USA suffer losses due to the agency implications of large corporate size which cannot be offset by benefits inherited by their political linkages. Consistent with agency theory, politically connections are indicative of agency issues within bidding firms which arises due to their large corporate size. The last empirical chapter examines the role of the social network hierarchy of financial advisors in a mergers and acquisitions framework. Theoretically, more centrally located financial advisors who have access to more and superior quality information should help acquire and target firms to achieve positive merger outcomes. However, the findings indicate that more centrally located advisors fail to create value for both bidders and targets while they charge higher advisor fees. The central financial advisors are more likely to be involved in high fee generating merger deals, hence they are found to have high likelihood to be involved in higher M and A activity, more likely to advise bidders than targets, large bidders, public and large deals. The overall results highlight that financial advisors exploit their relative power in their network to undertake takeover deals and pursue private benefits.

This thesis consists of three studies that investigate the channels through which corporate governance reforms, accounting choice, and social capital influence contracting in the corporate bond market. In Chapter 1 (solo authored), I examine the public debt contracting consequences of shocks to managerial entrenchment. For identification, I exploit the mandatory adoption of board independence rules under the NYSE and NASD listing requirements as a regulatory reform that enhanced the intensity of CEO monitoring by independent directors. Using a large sample of corporate bond issues, I find that the rules induced economically significant contracting effects in non-compliant firms, namely in the form of lower payout, financing, and event-related covenants as well as higher credit ratings. In further tests, I show that while these effects are not mitigated by shareholder control, they ultimately depend on directors' private incentives and their ability and willingness to engage in costly monitoring. My findings speak to the debate on how equity-centric governance interacts with bondholders' interests and their incentives to impose long-term restrictions on firms' economic activities. Chapter 2 (co-authored with Peter Pope and Ane Tamayo) examines the contracting relevance of the balance sheet in the corporate bond market. Using "accounting bloat" in net asset values as a proxy for balance sheet quality, we predict and find that aggregate covenant intensity in bond indentures is negatively associated with the quality of issuers' balance sheet numbers. The magnitude of this effect is more pronounced for accounting and event-related covenants and is lower in the case of covenants that restrict payouts, refinancing, and investment activities. Our results are robust to controlling for corporate governance quality and the stringency of monitoring by lenders in syndicated loan deals. Turning to market outcomes, we find that offering yields, credit spreads, and credit ratings are decreasing in balance sheet quality, while the likelihood of agreement among credit rating agencies about new bond issues' credit risk increases with balance sheet quality. To establish a causal link between balance sheet quality and covenant structures, we exploit an exogenous court ruling in Delaware that substantially limits the fiduciary duties of directors to creditors. We show how the legal event affected bond issuers' reporting incentives and altered the debt contracting relevance of their balance sheet numbers. Finally, in Chapter 3 (co-authored with Kalr Lins, Henri Servaes and Ane Tamayo), we investigate whether a firm's capital, and the trust that it engenders, are viewed favourably by bondholders. Using firms' corporate social responsibility (CSR) activities to proxy for social capital, we find no relation between CSR and bond spreads over the 2005-2013 period. However, during the 2008-2009 financial crisis, which represents a shock to trust and default risk, high-CSR firms benefited from lower bond spreads. These effects are more pronounced for firms that, when in distress, have a greater opportunity to engage in asset substitution or divert cash to shareholders. High-CSR firms were also able to raise more debt capital on the primary market during this period, and those high-CSR firms that raised more debt were able to do so at lower at-issue bond spreads, better initial credit ratings, and for longer maturities. Our results suggest that bond investors believe that high-CSR firms are less likely to engage in asset substitution and diversion that would be detrimental to stakeholders, including debtholders. These findings also indicate that the benefits of CSR that accrued to shareholders during the financial crisis carry across to another important asset class, debt capital.

This thesis investigates three issues related to risk-neutral pricing. The first aspect investigated is the effect of discretization and truncation errors on risk-neutral moments, as defined in Bakshi, Kapadia and Madan (2003). It proposes exact solutions for the finite integrals in the volatility, cubic and quartic contracts and compares its accuracy approach with the interpolation-extrapolation approach. It yields more accurate estimates for risk-neutral skewness and kurtosis for those assets which exhibit the volatility smirk. By contrast, for those assets dominated by the forward skew, the exact approach outperforms the interpolation-extrapolation approach for skewness only. The second issue investigated is the skewness preference. It seeks to explain the positive skewness preference through heterogeneous beliefs and overconfidence. An overconfident group longs more skewness in the positively skewed portfolio, over-estimates the value of this portfolio, causes heterogeneous beliefs and yields a positive skewness preference. The final issue investigated is the relation between risk-neutral kurtosis and returns. The relation can be either positive or concave and cannot be explained bu heterogeneous beliefs and overconfidence. There are important causality effects between skewness and kurtosis and evidence is presented that the relation between kurtosis and returns may not be independent.

Mergers and acquisitions (M&A) are internationally adopted expansion strategies which are imperative to business growth. However, not all M&A are successfully executed nor all post-M&A business expansion have achieved the intended results. Some M&A might have taken place for the wrong reasons. Studies on M&A typically focus on the M&A wave or post-M&A integration. By contrast, this research concentrates on the pre-M&A analysis and planning. Incorporating fuzzy set theory and Monte Carlo simulation, an M&A evaluation and prioritisation model (MAEPM) was established in this study to assist decision makers to implement and execute M&A deals more objectively and effectively, with the aim of maximising the success rate. Risk analysis, fuzzy critical path analysis, cost-benefit evaluation, as well as decision rule and prioritisation were integrated to support the MAEPM development. The success of M&A is highly uncertain and for that reason four risk factors (i.e., schedule, estimation, process, and external risks) were identified and mapped in every task in the M&A process for assessment and management. Time is one of the critical success factors in M&A. To enhance the accuracy of the MAEPM and to ensure effective M&A project delivery, fuzzy critical path analysis was employed to deal with subjective and vague human judgment in M&A project scheduling. The risk-bearing budget percentage and adjusted rate of return were calculated based on the cost-benefit evaluation of the model, particularly including the cost of manpower, which is regarded as the essential and second largest cost in M&A. All of these which form the MAEPM can provide insight into M&A evaluation and serve as indicators. In order to further facilitate firms to screen and select potential M&A projects in an effective manner, decision rule and prioritisation were created in this study as two decision gates to support M&A decision-making. Eleven case studies were conducted to verify the MAEPM. The results from the MAEPM were compared with the actual results of M&A deals made by the case company that confirmed the MAEPM is promising and reliable. By applying the MAEPM, firms can gain insight into the optimistic, normal, and pessimistic scenarios of different M&A deals for better strategic planning, resource allocation, and risk management. This enables firms to select the most ideal M&A deal(s) according to the availability of resources and capital, thus enhancing the success rate of M&A. The subject company, Sage International Group Limited (SAGE), used this tool to reevaluate some of its past M&A cases to better understand their post-M&A issues, and also to objectively and effectively evaluate all its possible future M&A. By using the MAEPM, SAGE not only reduced the turnaround time for each M&A deal screening by one third to more effectively compete for favourable M&A deals, which were less uncertain and had higher value in return, but also substantially reduced pre- and post-M&A costs by around HK$5-10 million annually. Another profound impact on the case company should be the improved chances of success of M&A deals because of the expected values generated. The novel MAEPM is confirmed to be reliable and is an important contribution to the field of M&A. The extension of its applicability is warranted to enable a better understanding of this holistic method of analysis and its impact on M&A deals in other sectors.

It is increasingly being recognised that identifying and evaluating customer’s banking behaviour has a strong effect on marketing success. However, there is a paucity of literature and empirical research on bank selection criteria in Bangladesh. Research data can potentially improve a bank’s performance. This research aims to contribute to the academic body of knowledge and better understand the managerial implications of customers’ bank selection criteria in Bangladesh. In order to fulfil this objective, this research developed a theoretical framework of bank selection criteria which has been tested on retail customers by integrating both the existing and potential customers. The theoretical framework is based on constructs documented in the consumer behaviour, service quality and services marketing literature. The results of this study suggest that retail customers’ bank selection could be better explained by the proposed theoretical framework. Bank selection is in fact a multidimensional construct as the selection of a bank is often related to purchasing a particular banking product or service which has a significant effect on the different dimensions of bank selection a customer may have. Banks need to integrate many criteria in their marketing strategies in order to be considered the optimal provider of financial goods and services. In general, banks would benefit from adopting two different marketing strategies in terms of segmenting, targeting and positioning: one for attracting potential customers and then a different strategy for retaining existing customers, as this research has identified significant differences between potential and existing customers’ bank selection processes.

This thesis extends the literature by adding new empirical evidence associated with firm’s decisions in fixed investment and capital structure, under the assumption of capital market imperfection. In Chapter 2, we combine a panel of over 95,000 Chinese manufacturing firms of different ownership types over the period 2000-2007 with the Marketization Index for China’s provinces during the same period and investigate whether or not, and how, the cross-regional differences in institutions and financial development can affect the firm level financing constraints. Our main results indicate that institutional and financial development in China can reduce financing constraints significantly for the investments of private firms and partly for foreign firms, while increasing the financing constraints for the investments of state and collective firms. Different from previous studies at aggregate level, we identify a positive relation between finance and growth in the Chinese economy from a micro-perspective. In Chapter 3, we estimate the respective effect of state ownership and share concentration on firms’ leverage adjustment speed towards optimal level by using the Chinese listed firms dataset (1998-2010). We find that the firms with state ownership present lower leverage adjustment speed towards optimal leverage ratio than their privately owned counterparts. A positive relation from share concentration to leverage adjustment speed is also detected. These results suggest that ownership structure can significantly determine a firm’s costs of adjustment as well as incentives to adjust. Our works offer a new channel for people to understand the heterogeneous leverage adjustment behaviours among firms. In Chapter 4, using the Chinese listed firms dataset (1998-2016), we test the casual relation from short debt maturity to firms’ fixed capital expenditure. After controlling the level of leverage, we obtain a significant negative coefficient on short debt maturity in the investment regression model, especially for the sample of firms with worse financial condition. This indicates that rollover risk plays an important role in determining firms’ investment decisions and it is more likely to be triggered at bad time. Overall, our research suggest several policy implications. First, deeper economic decentralization and further financial liberalization are important for reducing the resource misallocation between state and non-state sectors in the Chinese economy. Second, more applicable provisions for minority investor protection are required to be formulated, which are expected to provide more options for ownership reform in publicly listed SOEs. Lastly, alternatives for long-term debt financing, other than bank loans, have to be developed, thereby reducing the systematic rollover risk in the economy.

Market economies have been characterized by boom and bust cycles. Since the seminal work of Hamilton (1989), these large scale fluctuations have been referred to as regime switches. Ang and Bekaert (2002) were the first to consider the role of regime switches for stock market returns and portfolio optimisation. The key stylized facts regarding regime switching for stock index returns is that boom periods with positive mean stock returns are associated with low volatility, while bear markets with negative mean returns have high volatility. The correlation of asset returns also show asymmetry with greater correlation being found during stock market downturns. In view of the large portfolio losses from correlated negative movements in asset returns during the recent 2007 financial crisis, it has become imperative to incorporate regime sensitivity in portfolio management. This thesis forms an extensive application of regime sensitive statistics for stock returns in the management of equity portfolios for different markets. Starting with the application to a small 3 asset portfolio for UK stocks (in Chapter 4), the methodology is extended to large scale portfolio for the FTSE-100. In chapters 5 and 6, respectively, using stock index data from the subcontinent (India, Pakistan and Bangladesh) and for the Asia Pacific, optimal regime sensitive portfolios have been analysed with the MSCI AC Index (for Emerging and Asia Pacific Markets) being taken as the benchmark index. Portfolio performance has been studied using a dynamic end of month rebalancing of the portfolio on the basis of regime indicators given by market index and relevant regime dependent portfolio statistics. The cumulative end of period returns and risk adjusted Sharpe Ratio from this exercise is compared to the simple Markowitz mean-variance portfolio and market value portfolio. The regime switching optimal portfolio strategy has been found to dominate non-regime sensitive portfolio strategies in Asia Pacific and 3 asset portfolio for UK stocks cases but not in Subcontinent case (for the first half of out-sample period). In the case of the relationship of the sub-continental indexes vis-à-vis the MSCI benchmark index, the latter has negligible explanatory power for the former especially for the first half of out-sample period. Hence, the regime indicators based on MSCI emerging market index have detrimental effects on portfolio selection based on the sub-continental indexes. As regime sensitive variance–covariance matrices have implications for the selection of optimal portfolio weights, the final Chapter 7 uses the FTSE-100 and its constituent company data to compare and contrast the implications for optimal portfolio management of filtering the covariance matrix using Random Matrix Theory (RMT). While it is found that filtering the variance-covariance matrix using Marchenko-Pasteur bounds of RMT improves optimal portfolio choice in both non-regime and regime dependent cases, remarkably in the latter case for Regime 2 determined variance-covariance matrix, the RMT filter was least needed. This result is given in Chapter 7, Table 7.5-1. This confirms the significance of using Hamilton (1989) regime sensitive statistics for stock returns in identifying the ‘true’ non-noisy variance-covariance relationships. The RMT methodology is also useful for identifying the centrality, based on eigenvector analysis, of the constituent stocks in their role in driving crisis and non-crisis market conditions. A fully automated suite of programs in MATLAB have been developed for regime switching portfolio optimization with RMT filtering of the variance-covariance matrix.

The 2007-09 financial crisis highlighted the devastating impact of securitization on the stability of the banking system. However, studies on securitization are far from sufficient to show the impact on a bank’s performance. To better understand the impact of securitization in order to prevent such crisis to happen again, I study bank loan securitization in this Ph.D. thesis. This thesis aims to provide empirical explanations to answer two dilemmas in securitization literature. First, ambiguous results are presented in the impact of securitization on bank risk. Classic theories suggest that loan securitization allows securitizers to transfer the potential risk to outside investors and diversify the large exposure to a single shock by sharing this potential riskiness with all investors linked by securitized assets, which in turn decreases bank risk and increases the stability of financial system. However, recent evidence reveals that securitizers have the intention to ignore potential risk and take on more risk, introducing more risk into the financial system and increasing the level of bank riskiness. Second, securitization introduces a higher flexibility for banks to allocate their resources and increases bank efficiency accordingly. However, securitization process is closely linked to a large amount of upfront and managerial costs, which can lead to an additional burden to banks and decrease securitizers’ efficiency. This thesis develops a synthetic empirical analysis and shows a short- and long-term impact of securitization on bank risk, and a positive impact on a bank’s efficiency score. Details information are as follows. In the first chapter, I provide an introduction of the thesis. In chapter two, I present a comprehensive introduction on securitization, including both background history, literature, and related empirical issues. I also provide detailed information on securitization transaction in practice. In the empirical method review, this thesis highlights the self-selection problem in securitization. For example, the impact of securitization on bank performance may simply depend on a bank’s choice of whether to securitize their loans or not. In order to address such a problem, estimation methods including Heckman model, instrumental variable analysis, propensity score matching and Difference-in-Difference analysis, are discussed. From chapter three, I present empirical studies on the impact of bank securitization activities in the U.S. I first study the conflicts of the impact of securitization on bank risk. Risk transfer and diversification theories suggest that securitization reduce bank risk, while commentators blame the lending standard decrease as the main driver of the subprime crisis. Therefore, I conduct several methodologies to study the impact of securitization on bank risk in chapter three and the impact of securitization on the likelihood of bank failure in chapter four. The thesis studies the impact of securitzation on bank efficiency scores in Chapter five. The reported results suggest that bank loan securitization is associated with an efficiency increase effect. The reported results suggest that loan securitization allows banks to shift off undesirable risk through the true sale process, which in turn decreases bank’s capital requirement due to a decreased risk of capital. Bank liquidity can also be increased by transferring the illiquid loans into marketable securities. Both effects increase a bank’s financial flexibility and efficiency. The diversification of securitization also allows securitizers to allocate more of their resources efficiently. During the cross-variation analysis, results support the arguments above. In chapter six, I review all empirical results and provide explanations on the results. First, a short- and long-term explanation of the impact of loan securitization is provided. That is, bank loan securitization could reduce bank risk within a short term through risk transfer and diversification effect but increases the likelihood of bank failure in the long run, because securitizers are more likely to lower the lending standard or pursue regulatory arbitrage. Recent development of the securitization studies and practice are also presented. The last chapter concludes the study and point out the possible extensions of the study. This thesis provides extensive empirical results that adds to the extant studies on securitization.

In the first chapter, “Money markets and borrower transparency: Evidence from the Dodd-Frank Act stress testing policy”, I investigate the effect of increased public information disclosure on lending outcomes in money markets. Introduction of the Dodd-Frank Act Stress Testing policy and its mandatory results’ disclosure is used as a shock to the availability of information on banks subject to the policy. Using micro data on fund portfolio holdings, I show that funds increase their lending more to transparent relative to non-transparent banks after disclosures. Based on the relationship lending literature, I use the strength of the lending relationships to distinguish between more and less informed funds. Overall, my results are consistent with more information disclosure alleviating information asymmetries between borrowers and less informed lenders in the money markets, allowing banks to expand their borrowing. However, increase in borrowing after the disclosure is conditional on disclosure revealing positive information on the bank, which is in line with the disciplining role that disclosures are to play. In the second chapter, “Where did the money go? Evidence from money market funds on the portfolio balance channel of QE,” I aim to identify the portfolio balance channel as a transmission mechanism of Quantitative Easing (QE). I use micro data on money market fund portfolio holdings to investigate changes in MMF lending decisions and portfolio composition once the third wave of QE3 resulted in the withdrawal of Agency repo securities. My results suggest that QE3 did not induce outflows from the money market industry, but resulted in the increase in uncollateralized lending on behalf of funds with above-median QE3 exposure. My results indicate that this increase in uncollateralized lending remains concentrated within former repo issuing banks. The third chapter, “If fail, fail less: banks decision on systematic vs. idiosyncratic risk”, takes the theoretical approach to investigate the influence of bailout policy, contingent on the aggregate state and a bank’s individual characteristics, on the banks’ choice between systematic and idiosyncratic risk. The regulator who implements the ’fail less’ bailout policy i.e. prefers to bail out the banks with higher asset values in failure is introduced in the ’too many to fail’ paradigm. Results imply that once the bank’s bailout probability, conditional on the regulator’s intervention, depends on its value in failure, banks invest in the uncorrelated project more often. Therefore, this reduces the herding pressure of the ’too many to fail’ guarantees as well as the occurence of the systemic banking crises.

This thesis consists of three papers on asset pricing. In the first paper, I analyse the effects of volatility management (a trading strategy in which risky asset exposure is inversely proportional to the level of volatility) in a general equilibrium heterogeneous agent model. Two distinct types of agents populate the model economy, an unconstrained investor endowed with logarithmic utility over instantaneous consumption and a volatility-managed portfolio. My model goes a long way towards the rationalization of the behaviour of investment vehicles that follow investment management strategies that are isomorphic to the ones implied by the principles of volatility management. Whereas my theoretical approach offers a high degree of tractability, it is subject to some important caveats. Specifically, the model implies unrealistically high leverage for the unconstrained investor. In the second paper, I propose a general equilibrium intermediary asset pricing model featuring a heterogeneous intermediary sector. Two distinct types of intermediaries populate the financial intermediary sector: equity-constrained intermediaries and shadow financial intermediaries. The main theoretical contribution of this paper is threefold. First, I show that over the region of the state space where the intermediation constraint binds, the risk premium on the intermediated risky asset is decreasing in the degree of intermediary sector heterogeneity. Second, intermediary sector heterogeneity allows for rich leverage dynamics within the intermediary sector and at the level of the aggregate intermediary sector. Third, the constrained region shrinks relative to the benchmark model in which the intermediary sector is homogeneous. The third paper (co-authored with Philippe Mueller, Andrea Vedolin, and Paul Whelan), studies variance risk premia (VRP). We document a number of novel stylized facts related to the equity and the Treasury VRP (EVRP and TVRP) and show that (1) the short maturity TVRP predict excess returns on short maturity bonds; (2) long maturity TVRP and the EVRP predict excess returns on long maturity bonds; and (3) whereas the EVRP predicts equity returns for horizons of up to 6 months, the long maturity TVRP contain robust information for equity returns at longer horizons. Finally, we present evidence that expected inflation is a powerful determinant of the dynamics of the EVRP, the TVRP, and their comovement.