This dissertation contrasts the development of the regulatory structure of the American and German banking systems until the mid-20th century. It explains why the countries' regulatory structures diverged into diametrically opposite directions, even though both countries had federal political systems and regularly observed the developments in the other country. Furthermore, after the Second World War, the American military government was even able to mold the German banking system into an idealized version of the American one. The thesis also provides an explanation why this assimilation attempt ultimately failed, and why there was a strong institutional persistency between Nazi Germany and West Germany instead. The original contributions to knowledge are the following: (1) This thesis offers a novel perspective on the evolution of the structure of American banking regulation by interpreting it as being largely driven by constitutional conflict (2) it shows that prior to the Banking Crisis of 1931 there was no intention to introduce a comprehensive regulatory structure for the banking sector in Germany (3) It provides a reassessment of the origins of the German Credit Act of 1961 as a non-deterministic process (4) It interprets German banking regulation after the Second World War as a failed Institutional Assimilation, which provides evidence that the decentralized regulatory arrangement of the American banking system was held in place by strong states' rights. In the absence of strong states' rights such a system would not persist and, indeed, in Germany it did not (5) It re-interprets German post-war economic history as being driven by the need of the German federal government to re-establish supremacy over economic matters. This assigns a new important role for Ludwig Erhard in German post-war competition history, as being an enabler of liberalization rather than being a liberalizing force himself.

This thesis consists of three self–contained game–theoretic analyses of the contractual relationship between borrowers and lenders. A key element of this relation concerning their strategic variables than their opponents. Optimal contracts for different environments are derived and studied. They include ‘bankruptcy’ games, which are designed to structure the parties’ bargaining under certain circumstances. The first chapter questions the idea that being a unique lender to a firm is better than sharing the lender’s role. Even borrowers with poor prospects will apply for loans, if their main goal is to be financed, and re–financed if necessary. With one lender, refinancing is always provided once former loans are ‘sunk’. With two lenders, the situation may be different: inefficient negotiations have to determine how the overall loss is allocated. Some borrowers may therefore not be refinanced, and this may keep borrowers with poor prospects from applying for loans. The second chapter extends this model by adding a timing dimension: a borrower finds out about poor prospects earlier than his lender. He can ask for refinancing, or simply ‘wait and pray’. Either ‘soft’ contracts or ‘tough’ contracts may be optimal contracts: ‘soft’ contracts treat the borrower well if he asks for refinancing, while ‘tough’ contracts don’t (and the lender will not have the option of refinancing). ‘Hybrid’ contracts are strictly worse than the two ‘pure’ types. From this we draw conclusions for the design of bankruptcy laws, and for empirical work on bankruptcy. The third chapter analyses the interdependence of financial and production decisions. Debt contracts are frequently thought to lead to excessive risk taking — in a Cournot setup this means excessive production. At the same time, debt is a costly type of financing, which should reduce production. This conflict is analysed in a setting which allows to endogenise ‘debt’ contracts. The main result is that there is no excessive production, and financial constraints reduce output. However, for large levels of ‘inherited’ debt, it may be that output increases in the level of debt.

This thesis is composed by five chapters. Chapter 1 presents a new Keynesian open economy model that includes risk-adverse foreign-exchange market dealers and foreign exchange intervention by the monetary authority. In this setup portfolio decisions made by dealers add an endogenous time variant risk-premium element to the traditional UIP that depends on FX intervention by the central bank and FX orders by foreign investors. We use the model to analyse the interactions between monetary policy and FX interventions. Chapter 2 introduces information heterogeneity into the model presented in Chapter 1. As in Bacchetta and van Wincoop (2006), the \rational confusion" generated by the introduction of heterogeneous information magnifies the impact of the unobservable capital flows shocks on the exchange rate. Chapter 3 introduces fat-tailed shocks in the model of Kato and Nishiyama (2005). This is a simple new Keynesian model where the central bank explicitly considers the zero lower-bound constraint on interest rates. We find that shocks with `excess kurtosis' make monetary policy relatively more aggressive far away from the zero lower bound region though, this difference reverts when the economy is close to this constraint. Under our baseline calibration, the difference between optimal policies under Gaussian and fat-tailed shocks is not quantitatively significant. Chapter 4 presents a model in which investors form their expectations in an adaptive way to price bonds, in the spirit of Adam, Marcet and Nicolini (2011). We follow different assumptions regarding the learning process followed by agents. In the case of finite maturity bonds, the knowledge of the pricing of the first maturity will act as an 'anchor, limiting the price volatility of bonds with short maturities. As the maturity increases, the price volatility converges to the one of the consol bond. Chapter 5 surveys the literature on imperfect information, learning and the yield curve.

There has been much interest in finance theory in the question of how they cost of bankruptcy influences the firm's capital structure. Authors such as Modigliani and Miller (1956), Stiglitz (1969), Bulow and Shoven (1978), Titman (1984) and Barnea, Haugen and Senbet (1984) have provided much theoretical analysis. However, very few empirical studies have been conducted. Notable exceptions are those by Warner (1977) and Altman (1984). These studies looked only at bankruptcy cases in the US. One of the main problems in bankruptcy cost measurement is that there is little agreement on definition of bankruptcy cost components. In addition, the distribution of these costs has not been studied in any great detail in finance theory so far.

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The present dissertation includes three essays on initial public offerings (IPO). The first chapter investigates the impact of venture capital (VC) syndicate size and diversity on the IPO and post-IPO performances of investee companies. We provide evidence that firms backed by larger and more diverse VC syndicates experience greater underpricing and lower post-IPO profitability. We suggest that this might be the consequence of coordination problems and conflicts of interests within large and heterogeneous VC syndicates which ultimately results in poorer added value for the investee companies. We also provide some evidence that the negative impact of VC syndicate size and diversity on IPO underpricing can be mitigated by the existence of alternative monitoring mechanisms such as bank loans. In the second essay, using text sentiment analysis, we investigate the relationship between tone, length and information content of prospectuses and underpricing in a sample of UK IPOs between 2004 and 2012. The peculiar feature of the UK IPO market is the wide use of fixed-priced offerings to go public, which, contrary to bookbuilding, does not allow any price discovery. Our results show that, for fixed-priced IPOs, the length of the admission document is positively correlated to the offer price and negatively correlated to underpricing and to ex-post volatility, whereas different tone and information content in the document seem to matter less. We further show that admission documents have become substantially longer for all types of IPOs since the recent financial crisis but that their impact on IPO pricing appears to be significant only during the pre-crisis period. The last chapter, the third essay, investigates how the market for European IPOs has changed, if at all, since the recent financial crisis. For this purpose we have constructed a comprehensive dataset of European IPOs between 2000 and 2012. Our research focuses on whether and how the costs, both direct and indirect, of going public have changed in the wake of the recent financial crisis. Our results suggest that both underpricing and underwriting fees have decreased since 2007. A closer look at the underwriting markets also shows that, since the financial crisis, underwriters have tended to syndicate more, and that there are some newcomers among the top ten underwriters. Additionally, we shed some light on the determinants of going public during post-crisis period, and we find that traditional models are of very little use in explaining IPO decisions during the recent recession.

The capital provided by private equity (PE) and venture capital (VC) investors represents an alternative type of financing available to firms in comparison to more traditional financial intermediaries such as banks, equity from owners or angel investors. These financial sponsors not only provide funding, but also complete intense restructuring, improve corporate governance, align interest of managers and shareholders, provide certification and improve performance (Jensen 1986, 1989; Baker and Wruck, 1989; Baker and Gompers, 2003; Hochberg, 2012; Acharya et al, 2009). These investors are likely to realize their highest returns by bringing their sponsored firms to the stock market in the form of initial public offerings (IPOs). However, in practice PE and VC investors do not always exit fully at the IPO date (Celikyurt et al, 2014; Krishnan et al, 2011; Cao, 2011). They tend to maintain a block ownership in some IPOs, which allows them to remain actively involved in shaping firms' corporate policies. It is of great importance to academics, practitioners and other market participants to understand why these investors carry on investing in firms they brought to the market and whether such holdings create or destroy value. These issues motivate my research agenda. I focus on investigating PE and VC investors' post-IPO presence in firms, their effect on corporate policies and impact on the long-run performance. In particular, the three chapters of my thesis pursue the following three distinct objectives: (i) to answer the fundamental question concerning the motivation of PE and VC investors to retain ownership in the post-IPO period and whether this retention affects the firm’s aftermarket performance (ii) to examine whether PE and VC investors remain active monitoring agents and exert significant influence on various corporate policies (iii) to investigate the effect of PE and VC ownership retention on firms' cash reserves, which, as documented in previous studies, can lead to significant agency conflicts. Hence, the main objective of my thesis is to explore the extent, type and channels of private equity and venture capital investors' involvement in firms post-flotation, and its impact on the long-run performance. To answer these research questions, I use a large sample of US and UK IPOs over the 1997 and 2010 period. In this dissertation, I differentiate and analyse separately firms backed by PE and VC investors because these investors are different in many respects, particularly since they provide capital to distinctive type of companies, as VCs invest mainly in young, growing, high-tech firms, while PE investors are likely to back high cash flow mature firms in stable industries. I provide a comparative analysis across these investors to assess whether, after controlling for these fundamental characteristics, their involvement, investment and strategies with their IPOs in the post flotation period are homogeneous. I also contrast the US and the UK markets which I found to be significantly different in terms of the composition of these two types of investors, but also the characteristics and annual distributions of IPOs. In the first empirical study, I focus on the motivations of PE and VC funds to retain voluntarily ownership, defined as holdings outside the lockup restrictions, in the post-IPO period. I test the monitoring and signalling hypotheses, which suggest that IPOs in which VC and PE firms retain their holdings in the post-IPO period are more likely to generate higher returns because of these funds’ certification and their ability to monitor companies in which they hold large stakes. I find that in contrast to UK, where both type of financing play an equally important role in bringing companies to the stock market, the relative importance of VC-backed IPOs in the US is time varying. Moreover, the VC-backed IPOs are equally distributed across various industries in the UK, whereas VC financing is more prominent in certain industries in the US such as high-tech, telecommunications and healthcare. I find a non-monotonic (convex) relationship between financial sponsors’ voluntary ownership and firm performance. Hence, in contrast to managers who become entrenched at higher levels of ownership, financial sponsors create value in companies they hold more concentrated equity stakes. More specifically, I document that financial sponsors’ ownership is positively related to firm value when PE and VC investors’ stake is above 1.83%. Therefore, continued involvement of financial sponsors in the post-flotation period is beneficial for the shareholders. Also, I present evidence that compulsory and voluntary financial sponsors’ equity retention is used to mitigate potential managerial expropriation of outside shareholders. I demonstrate that a different institutional framework in UK and US has a significant impact on financial sponsors’ divestment extent at the IPO date and in the post-flotation period. I find that investment banks impose significantly stricter lockup restrictions (in terms of how much shares to retain) on financial sponsors involved in US backed IPOs than in UK ones. This is driven by more dispersed ownership in US companies, whose market is defined by a lower prevalence of institutional investors and the largest group of shareholders in the US being individual investors. In addition, I find that PE/VC house and underwriter reputations are only considered to be alternative commitment devices in the UK. I also highlight a number of other factors which affect voluntary ownership of PE and VC investors in the post-IPO period. In particular, I show that PE and VC fund characteristics (syndicate size, PE/VC fund’s bank-affiliation and low proximity to IPO firm headquarters) partially explain compulsory and voluntary holdings of financial sponsors post-flotation. This paper extends the literature on IPOs' performance by demonstrating that financial sponsors divest fully from stronger firms at the IPO date, while commit their resources to underperforming ones in which they create value in the post-flotation period. The second empirical study focuses on examining whether PE and VC investors create value by actively shaping IPO firms’ corporate policies in the post-flotation period. In this paper I focus on three corporate policies, namely the corporate governance, as reflected in the structure of the board of directors, the investments’ spending patterns, and the payout policy. These decisions are identified in prior literature to have a direct impact on firm value. I demonstrate that PE and VC investors with retained ownership continue to extensively monitor their backed IPOs. However, the two types of investors implement different monitoring approaches, which are driven by fundamentally different characteristics of the firms they finance: PE investors’ ownership has a significant positive effect on the board’s size, while VC investors primarily focus on the proportion of independent directors on the board of directors. Moreover, I find that the ownership structure of financial sponsors has a material impact on monitoring of portfolio firms, as IPOs backed by bank-affiliated PE funds have significantly larger boards. In terms of investment decisions, VC investors minimize expenditures in all retained IPO firms. PE sponsors’ only reduce expenditures in IPOs with low proximity, so when PE investors’ monitoring abilities are significantly constrained by distance and hence costs of monitoring are higher. In contrast to non-backed IPOs, I find that financially sponsored companies are more likely to initiate a payout via dividends.

This thesis consists of three essays on international finance. In the first study, we examine the properties of carry trade and momentum returns in the interwar period currency markets. We find that these active currency trading strategies earn an annualized average excess return of about 7%, consistent with estimates from modern samples. On the grounds that the interwar period represents rare events better than modern samples, we provide evidence unfavorable to the rare disaster based explanation for the returns to the carry trade and momentum. Global FX volatility risk, however, turns out to account for the carry trade return in the interwar sample as well as in modern samples. In the second study, we provide a scientific account for the risk-off phenomenon which refers to a change in risk preferences and the effect on asset prices of the associated portfolio rebalancing. We identify risk-off episodes as a switch to a polarized correlation regime of currency returns. These risk-off transitions are relatively infrequent but noticeably increasing over time. They are persistent and associated with geopolitical events. Finally, risk-off switches are unrelated to changes in macroeconomic fundamentals and to other shocks. Risk-off switches have very significant spill-over to the returns of broad asset classes and trading strategies and are associated with significant changes in the positions of professional investors across different financial markets. In the third study, we explore the broader implications of the present value relations for return predictability. More specifically, we estimate global risk premium factors in international stock markets, international bond markets, and the currency markets from the whole cross-section of present value measures (the price-dividend ratio, bond yields, and the real exchange rate, respectively for the abovementioned three asset classes). We find that the global risk premium factors: substantially improve the predictability of returns relative to the asset-specific present value measures; are intimately linked with macroeconomic fundamentals; and imply strong and consistent exchange rate predictability.

This thesis identifies and quantifies the impact of cognitive errors in certain aspects of investor decision-making. One error is that investors are unaware that the Internal Rate of Return (IRR) is a biased indicator of expected terminal wealth for any dynamic strategy where the amount invested is systematically related to the returns made to date. This error leads investors to use Value Averaging (VA). This thesis demonstrates that this is an inefficient strategy, since alternative strategies can generate identical outturns with lower initial capital. Investors also wrongly assume that the lower average purchase cost which is achieved by Dollar Cost Averaging (DCA) results in higher expected returns. DCA is a similarly inefficient strategy. Investors also adopt strategies such as Volatility Pumping, which appears to benefit from high asset volatility and large rebalancing trades. This thesis demonstrates that any increase in the expected geometric mean associated with rebalancing is likely to be due to reduced volatility drag, and that simpler strategies involving lower transactions costs are likely to be more profitable. Academic papers in highly-ranked journals similarly misinterpret the reduction in volatility drag achieved by rebalanced portfolios, mistakenly claiming that it results from the rebalancing trades “buying low and selling high”. The previously unidentified bias in the IRR has also affected an increasing number of academic studies, leading to misleadingly low estimates of the equity risk premium and exaggerated estimates of the losses resulting from bad investment timing. This thesis also derives a method for decomposing the differential between the GM return and the IRR into (i) the effects of this retrospective bias, and (ii) genuine effects of investor timing. Using this method I find that the low IRR on US equities is almost entirely due to this bias, and so should not lead us to revise down our estimates of the equity risk premium. This method has wider applications in fields where IRRs are used (e.g. mutual fund performance and project evaluation). In identifying these errors this thesis makes a contribution: (i) to the academic literature by correcting previous misleading results and improving research methods; (ii) to investment practitioners by identifying avoidable errors in investor decision-making. It also makes a contribution to the field of behavioural finance by altering the range of investor behaviour which should be seen as resulting from cognitive error rather than the pursuit of different objectives.

This thesis presents three papers in the field of international finance and provides a study of the international capital flows from a macro-finance perspective. The first paper is an empirical investigation of the relative importance of hot money in bank credit and portfolio flows from the U.S. to 18 emerging markets over the period 1988-2012. We deploy state-space models à la Kalman filter to identify the unobserved hot money as the temporary component of each type of flow. The analysis reveals that the importance of hot money relative to the permanent component in bank credit flows has significantly increased during the 2000s relative to the 1990s. This finding is robust to controlling for the influence of push and pull factors in the two unobserved components. The evidence supports indirectly the view that global banks have played an important role in the transmission of the global financial crisis to emerging markets, and endorses the use of regulations to manage international capital flows. The second paper examines the role played by cross-border equity, bond and bank credit flows versus international trade in the transmission of the U.S. subprime crisis to equity markets worldwide. We estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries. The results from an eclectic methodology that includes causality tests, generalized impulse responses and forecast error variance decompositions indicate that the subprime crisis is mostly transmitted through bank credit rather than portfolio flows and international trade. The results are robust to altering the exogenous versus endogenous vectors of variables, to measuring equity prices in U.S. dollars or local currency, to averaging the data across countries versus averaging the parameters from individual country estimation, and to redefining the start date of the crisis. The findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability. Finally, the third paper examine the two steps and the prediction of Uncovered Equity Parity (UEP). Within a portfolio-rebalancing framework, UEP predicts that countries with strong equity markets should experience a currency depreciation, as higher total returns in domestic equity market will cause foreign investors to repatriate some of their investments to decrease their exchange rate exposure, leading to exchange rate depreciation. Using daily equity flow data including all the recorded trades of foreign investors for six Asian EMs from the 1990s to 2013, we find a positive rather than a negative relationship between currency and equity returns. We document that it is because the foreigners in aggregate chase returns rather than rebalance their portfolios in emerging markets, while foreign equity flows do cause exchange rate movements in the same direction. Thus, we unveil another side of UEP. Additionally, we find little evidence that foreign equity flows respond to past currency returns, suggesting that foreign equity investors only use local currency as a vehicle investing in emerging markets.