The present thesis examines whether important corporate governance characteristics of British boards are related to corporate cash holdings/liquidity, firm performance and stock price crashes. By conducting this research, we examine the informational content for investors and policymakers of two important corporate governance characteristics: i) the number of directorships held by executive directors or directors’ “busyness”; ii) the level of gap in compensation companies pay to their CEO and other executive directors, or CEO “pay slice”. Chapter 2 examines the effect of board busyness on corporate cash holdings. We offer new insights by evaluating two conflicting views regarding the quality of service that busy directors provide to corporate boards and their impact on decision making. One view is that directors who simultaneously serve on multiple boards improve board decision making ability as they have better experience and business connections (reputational effect).The opposite view is that directors with multiple seats are “too busy to mind the business”, which creates serious agency problems and leads into suboptimal corporate decisions (busyness effect). We analyse a large sample of UK listed companies over the 1997 to 2009 period and document evidence supporting a non-linear relationship between our proxy for board busyness and corporate cash holdings. In line with the reputational effect, we find that companies with board members that hold seats in other companies maintain a higher level of cash, net cash and financial slack. This effect is present, however, only at low levels of board busyness. In line with the busyness effect, our findings suggest that as board busyness increases beyond a certain threshold, it negatively affects cash holdings, net cash and financial slack. Chapter 3 examines a relationship between the CEO Pay Slice (CPS) – the fraction of the top five executive directors’ total compensation that is captured by CEO - and firm value in the UK. CPS reflects the relative importance of CEO as well as the extent to which the CEO is able to extract rents . CPS may also alter effectiveness of board performance by influencing cooperation and cohesiveness among its members. Using a large sample of UK-listed companies over the 1997 to 2010 period, we document evidence supporting a negative relationship between CPS and firm value as measured by Tobin’s Q. Our results are consistent with the hypothesis that high CPS is associated with agency problems, and is likely to impact negatively on the executive team’s spirit and motivation. Our results have major implications for the on-going debate on how to reform executive remuneration, and highlight the importance of considering remuneration issues at the board level, supporting the principles of UK Corporate Governance Code (2010). Chapter 4 examines the relationship between corporate governance characteristics and risk of stock price crash in UK firms. We use CEO Pay Slice (CPS) – the fraction of the maximum top-five executives’ total compensation that goes to the CEO, and board ‘busyness’ – the proportion of board level directors who have three or more directorships , to evaluate the effect of these two important aspects of corporate governance on stock price crash risk. The CPS reflects relative importance of the CEO as well as the extent to which the CEO is able to extract rents and expropriate shareholders wealth (expropriation effect). Board busyness may create a serious agency problem because directors are “too busy to mind the business”, allowing for executives’ short-termism and bad news hoarding (busyness effect). Stock price crash risk captures asymmetry in risk, especially downside risk, and is important for investment decisions and risk management (Kim et al., 2014). Using a large sample of UK listed companies over the 1997 to 2010 period, we document evidence supporting a positive relationship between CPS, board busyness and stock price crash risk. In line with the expropriation and busyness effects, we find that companies with high CPS and high levels of board busyness are exposed to higher level of stock price crash risk. The fact that CPS positively impacts on stock price crash risk has a strong implication for the on-going debate on how to reform executive remuneration so that it provides the right incentives to directors. There is also a direct implication for the public debate on limitation of the number of directorships held by executives from our findings, as we argue that board effectiveness depends on the overall level of board business. Chapter 5 concludes this thesis, providing an overview of its contribution and empirical results and outlining their implications.

The present thesis examines one of the non–standard preferences, the theory of disappointment aversion (DA) from Gul (1991), within an asset allocation problem. Related to the area of decision–making under risk, it sheds light on: (i) at the global level, how the risk exposure reduces quantitatively in the presence of disappointment aversion; (ii) given the empirical data, what are the plausible levels of disappointment aversion around different financial markets; and (iii) how disappointment aversion interacts with both inherent risk attitudes (i.e., risk aversion, subjective probability weighting and cultural dimensions) and environmental stimuli (i.e., pleasant or unpleasant odours). In Chapter 2, drawing upon the seminal study of Ang et al. (2005), we incorporate disappointment aversion (that is, extra aversion to outcomes that are worse than prior expectations) within a simple theoretical portfolio choice model. Based on the results of this model, we then empirically address the portfolio allocation problem of an investor who chooses between a risky and a risk–free asset using international data from 19 countries. Our findings strongly support the view that disappointment aversion leads investors to reduce their exposure to the stock market (i.e., disappointment aversion significantly depresses the portfolio weights on equities in all cases considered). Overall, our study shows that, in addition to risk aversion, disappointment aversion plays an important role in explaining the equity premium puzzle around the world. In Chapter 3, we investigate investors’ asset allocation when their utility consists of wealth utility and disappointment aversion utility in which gains and losses are calculated with respect to the expected wealth. We show that optimal investment proportions increase when disappointment aversion on the assets decreases, and that disappointment aversion increases when expected excess returns increase. When decreasing absolute risk aversion holds, disappointment aversion increase with wealth, which is supported by our empirical results with asset allocations in pension funds of 35 OECD countries. We also find that individualism is positively related to disappointment aversion. These results indicate that the overconfidence represented by their individualism leads to more disappointment when losses occur. Chapter 4 aims to investigate the role of odours on DA in a monetary gamble task. We elicited the degree of DA based on an experimental procedure similar to Sokol-Hessner et al. (2009, 2013). Our study shows for the first time that unpleasant odours increase DA in a monetary gamble task. Such odour–related variations in individual DA were associated with hedonic evaluations of odours but not with odour intensity. Increased disappointment aversion while perceiving an unpleasant odour suggests a dynamic adjustment of aversion to losses. Given that odours are biological signals of hazards, such adjustment of disappointment aversion may have adaptive value in situations entailing threat or danger. Chapter 5 concludes this thesis and points out further directions.

This study investigates the effects of board structure and the presence of female directors on corporate risk-taking behaviour of UK public firms. The research employs a sample of 589 firms from the non-financial sector and 276 firms from the financial sector listed in the FTSE All-Share Index on the London Stock Exchange over the period 2003-2012. The main objective of this research is thus to examine the effect of board structure characteristics and the presence of female directors on corporate risk taking in UK publicly listed companies. After controlling for three types of endogeneity, i.e. simultaneity, unobserved heterogeneity and dynamic endogeneity, through the application and use of a dynamic panel estimator system GMM, this study finds that board structure and female directors are important determinants of corporate risk taking in the UK. Board independence and CEO/Chairperson duality are negatively related to corporate risk taking in both the financial and non-financial companies. In addition, the findings indicate that larger boards in the non-financial sector result in lower corporate risk taking whereas no impact of board size was found in the financial sector. While analysing the percentage number of female directors on corporate risk taking, it was revealed that the presence of female directors on corporate boards in the non-financial sector increases the corporate risk taking and thus works in line with shareholders’ interests and expectations. Moreover, the study finds that this positive significant effect has a quadratic concave effect on corporate risk taking. However, in the financial sector no significant effect on risk taking is shown by the presence of female directors. After considering the effect of financial crisis, it was found that the non-executive directors work in line with shareholders’ interests and support more risky investments in the pre-crisis period in the non-financial companies. However, the non-executive directors in the financial sector behave in a more conservative way, and negatively affect corporate risk taking in both the pre-crisis and post-crisis periods. Moreover, in both sectors duality is found to be negatively related to corporate risk taking during the crisis period only, with no significant effect found for duality in the pre- and post-crisis periods. Further, the positive effect of female ix directors in the non-financial companies appears only in the pre-crisis period. Overall, the findings of this research would be important for the regulators and policymakers responsible for establishing corporate governance regulations for both the financial and non-financial sectors in the UK.

This study investigates the effects of ownership level, concentration and owners’ identity on stock market liquidity in the UK. The study also examines the effect of the recent financial crisis on the relationship between ownership level, concentration, owners’ identity and market liquidity in the UK. The sample includes 226 non-financial companies from the FTSE All-Share Index listed on the London Stock Exchange, over the period between 2003 and 2012. After controlling for two types of Endogeneity, i.e., simultaneity and unobserved heterogeneity, through the application and use of a pooled OLS year and industry dummies, this study finds the evidence suggesting that ownership level, concentration and owners’ identity are important determinants of market liquidity in the UK. The results suggest that insider ownership and ownership concentration are negatively correlated with market liquidity. In contrast, institutional ownership has been identified as positively correlated with market liquidity. While analysing the effect of owners’ identity on market liquidity, it was revealed that executive and non-executive directors’ ownership both decrease market liquidity. The findings also suggest that the existence of controlled shareholders (i.e., investment banks, government, pension fund, and foreign ownership) have a negative impact on firms’ market liquidity. However, the presence of free float shareholders in a firm’s ownership structure has a positive impact on market liquidity. As a result, this study regards the free float shareholders as uninformed investors whereas controlled shareholders and insiders are regarded as informed investors because they have access to a firm’s private information. After considering the effect of financial crisis, it was revealed that both the insider ownership and ownership concentration insignificantly negatively affect market liquidity in the pre-crisis, crisis and post-crisis periods of the recent financial crisis. However, institutional ownership had a significantly positive impact on market liquidity during the 2007-2009 financial crisis. With respect to insider identity, both executive and non-executive directors’ ownership have a negative impact on market liquidity. Nevertheless, controlled shareholders (i.e., investment banks, government, employee, pension fund, foreign) ownership had an insignificantly negative impact on market liquidity, whereas free float shares had an insignificantly positive impact on market liquidity during the recent financial crisis. Keeping in mind the importance of market liquidity in the economy, it can be argued that the findings of this research have implications for the current and potential investors, policymakers and practitioners. As a result, the outcome of this study demands that firms should pay more attention to their ownership structure disclosure policy and improve quality of the disclosed information as much as possible.

This thesis examines the determinants, the dynamics and the implications of international portfolio capital flows (PCF) to Emerging Markets (EM). It consists of 3 separate chapters focussing on different aspects of international PCFs. The literature documents that international portfolio equity investment depends on factors additional to returns and variance/covariances. First chapter presents a portfolio selection problem that takes into account the presence of additional factors and can match the actual United States (US) investment data. A recent series of IMF Staff Discussion Notes warns that capital controls may deflect PCFs across countries. The second chapter investigates whether these effects exist in a comprehensive global econometric model. Overall, results indicate that there are no significant deflection effects. Furthermore, it studies the domestic effects and the drivers of PCFs. The third chapter analyses the time-varying global drivers of PCFs to EMs in recent decades. Moreover, it involves identifying surge and stop episodes and comparing their time-varying characteristics. Finally, it investigates the effects of the US Quantitative Easing (QE) program on PCFs to EMs in 2009 by conducting a counterfactual exercise. Results indicate that there have been changes in the importance of different factors over time and QE had a significant positive effect on PCFs during 2009.

In this dissertation, I examine the relationship between market structure and average stock returns in the London Stock Exchange during 1985 and 2010. Using Multifactor asset pricing theory, I test whether industry concentration is a new asset pricing factor in addition to conventional risk factors such as beta, size, book-to-market equity, momentum, and leverage. I find that industry concentration is negatively related to average stock returns in all Fama-MacBeth cross-sectional regressions, even after controlling for beta, size, book-to-market equity, momentum, and leverage. In addition, there is strong evidence of a growth effect. Firms or industry portfolios with smaller book-to-market equity ratios have significantly higher returns. In contrast, beta is never statistically significant. The above results are robust to firm- and industry-level regressions, and the formation of firms into 100 size-beta portfolios. The time-series results show some evidence that industry concentration premium contains separate information compared with other risk premiums or risk factors and helps explain the time-series variation in stock returns, even after accounting for the premiums of beta, size, book-to-market, momentum, and leverage. The empirical findings indicate that competitive industries earn, on average, higher risk-adjusted returns than concentrated industries. An explanation is that investors in more competitive industries require larger return premiums for greater distress risks associated with these industries.

The study aims to establish whether or not the Optimum Currency Area (OCA) theory criteria are endogenous to regime change. To reach this aim I used data on eleven of the Economic and Monetary Union (EMU) countries, the United Kingdom (UK) and the United States (US), and I investigate two linked issues: the first is related to the OCA preconditions and it addresses the questions: if and to what extent the EMU members had satisfied the fulfilment OCA theory criteria before they joined the EMU; the second is related to the working of an OCA and it addresses the question of whether or not EMU membership has prompted a process of endogenous convergence. In particular, I examine whether adjustments have taken place through real wages or unemployment channels both before and after the establishment of the EMU in 1999 and the extent of convergence between the EMU members. I compare the findings of the EMU members versus the two non-EMU countries: the UK and the US. The comparison is carried out using two sets of indicators, each of which measures different aspects of OCA dimensions: the first set of indices measures the degree of convergence/divergence reached before and after 1999 and the extent of the endogenous convergence process prompted by the OCA; this set includes indices such as the correlation coefficient, the cross-country coefficient of variation, the asymmetry index and the persistence index. The second set of indicators comes from the econometric estimates and analysis of vector error correction and reduced-form VAR models, impulse response functions and variance decomposition; these indicators enable me to compare the responses of each national economy to relative demand, relative supply and policy shocks, and to compare the time persistence of these responses before and after the EMU. These indicators also allow identifying differences across the EMU national economies in terms of degree of convergence and divergence pre and post OCA. From these examinations I conclude that: (i) before 1999, the EMU members did not satisfy a large number of the OCA pre-requisites even though these economies tended to be more compliant with such criteria than non EMU countries such as the UK and the US; (ii) before 1999, there was an evident difference in the degree of OCA-compliance between a core group of members consisting of Germany, Italy, France and the Netherlands and a peripheral group consisting of Belgium, Ireland, Austria, Finland, Greece, Portugal and Spain; (iii) the establishment of the EMU has constituted a regime change that instigated an endogenous convergence process for some but not all of the EMU members, particularly in the labour market for countries such as Austria, Belgium, Finland, Germany, Ireland, Portugal and Spain mainly due to policy coordination; (iv) the process of endogenous convergence has been stronger and faster with respect to business cycle and the competitive index, with a discernible tendency for the nominal rather than real adjustment in international trade and the labour market variables; (v) however, the evidence of endogenous convergence has not been strong enough to eliminate differences between the core and peripheral members of the EMU – mainly because of faster convergence across the former group relative to the latter and because of more nominal rather than real channel-based adjustments across countries.

This thesis compromises one literature review chapter and three essays which focus on the theme of valuation, value premium anomaly, R&D premium anomaly, momentum anomaly and emerging markets. The first essay is entitled “Does Low Book-to-market Predict Low Returns? The Other Side of Growth: Research and Development Investment”. In this essay, I develop a theoretical framework of the risk and return of R&D, and examine the relation between R&D and BM. This paper documents that the intersections of R&D and BM produce enhanced trading strategies, and that the four-factor model, with a R&D factor, outperforms the three-factor model. The second essay, entitled “Firm Characteristics and Momentum”, studies the momentum anomaly. In this essay, I examine the relations of firm characteristics and momentum in US stocks. Momentum effect seems to be less significant in recent years. Most importantly, this paper presents that firm size and growth option may plays an important role in momentum trading strategy. The returns of large and medium winners/losers tend to sustain, while small winners/losers tend to reverse quickly. Also, it also shows that R&D investment enhance the reversal effect of small firms, especially in high-tech industries. The third essay, entitle “Firm Attributes and Momentum Strategies in China”, focus on the emerging market China. This study investigates the momentum and reversal phenomenon in China, based on most up-to-date data. It shows that Chinese stock market experiences barely momentum effect, but the reversal effect is increasingly significant in the long horizon. Additionally, two risk proxies, size and R&D expense, are employed to explain momentum and reversal effect. It shows that the returns of large stocks are more likely to be persistent, while that of small firms are more likely reverse. Moreover, R&D investment reduces reversal effect, especially for small firms.

The starting point of the thesis is the contention of Nurkse (1944) that exchange rates in the 1930's were unstable and subject to destabilising speculation. This view has been widely accepted and the few studies that have examined the issue since tend to be obscure and limited in scope. The principal objective of the present study is to provide a thorough (mainly econometric) test of the counterhypothesis that exchange rates were, in fact, determined by "economic fundamentals" (particularly relative prices, incomes and interest rate differentials) in this period. Consequently, a model of exchange rate determination is developed and applied to the currencies of Britain, America, Canada, France, Belgium, Holland and Switzerland, both bilaterally and multilaterally. The calculation of multilateral (or effective) exchange rates for the 1930's was considered a useful exercise in itself since they did not appear to be available. It seemed, therefore, desirable to digress and examine the methodology of their construction and to consider some general implications of referring to multilateral (instead of bilateral) exchange rates in the 1930's, before using them to test the central hypothesis multilaterally. The main conclusion of the thesis is that, to a large extent, exchange rates were indeed determined by "economic fundamentals" and were not distorted by persistent de-stabilising speculation (the Nurkse view), although the latter was important occasionally. The evidence was stronger for bilateral than multilateral rates; however, this probably reflects the limited nature of the tests involving the latter. Finally, where there was sufficient information for an adequate test, official intervention was also found to be important and, more generally, it was argued that any instability wa6 probably due more to government intervention than to de-stabilising speculation.

This thesis examines whether strong exogenous shocks to the sentiment of sophisticated financial agents can influence their decision-making. To capture any sentiment changes, we use extreme negative events such as terrorist attacks and mass shootings. Specifically, we conjecture that financial agents that are local to these events during the period of the attacks should experience strong negative feelings related to fear and anxiety, which in turn would affect their decisions. In the first chapter, we examine whether terrorist attacks and mass shootings tend to affect the earnings forecasts of sell-side equity analysts. Our findings suggest that analysts located near these events are more likely to issue pessimistic forecasts. This effect becomes stronger when the distance between the analyst and the event decreases, when fewer days separate the event and the forecast, and when the analyst resides in a region with low murder rate. Interestingly, pessimistic analyst forecasts are more accurate since the negative sentiment induced by terrorist events partially mitigates the well-documented optimism bias among equity analysts. In the second chapter, we focus on corporate managers and examine whether they apply different firm policies when they are exposed to such negative events. Our results show that local firms around attack periods increase cash holdings, and reduce R&D expenditure and long-term leverage. These effects are temporary, and become weaker as the firm-event distance increases. Further, we show that these effects are mainly concentrated in firms managed by younger CEOs, and tend to be larger for events with greater media coverage. In the third chapter, we show that institutional investors located near these terrorist events tend to increase their selling propensity around that time period. Similar to previous chapters, we find that this effect becomes stronger as the geographical proximity of investors to the location of the attacks increases, and when investors trade near the date of the attacks. However, these effects are less pronounced for firms which entail higher transaction costs such as small-sized firms, illiquid firms, and firms with volatile and skewed stock returns. Such trading behavior has a negative impact on the quarterly trading performance of institutional investors and on stock returns. Overall, our findings are consistent with the view that strong negative shocks to sentiment, induced by extreme negative events, can significantly affect the decision-making of sophisticated financial agents such as sell-side analysts, corporate managers and institutional investors.