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Chapter 2 undertakes a new investigation of the potential for options to mitigate short sale constraints, conducing two event studies which examine 1732 option introductions and the differential effect of the 2008 short sale ban on optioned and non-optioned stocks. I find option introduction mitigates 79% of the price adjustment efficiency disparity between short sale constrained and unconstrained stocks in relation to negative news. I also find evidence that negative information was incorporated more freely into optioned stocks during the short sale transaction ban of financial sector stocks. These results collectively suggest that in the presence of binding short sale constraints, options act as an effective substitute to short sales, significantly contributing to the informational efficiency of the market. In Chapter 3 we examine the determinants of success of foreign cross-listings in the U.S. using cumulative returns surrounding the cross-listing event and liquidity on the U.S. exchange as joint metrics of success. We find that the post-listing liquidity and valuation benefits of cross-listings are crucially dependent both on prior home-market success and on U.S. institutional holdings in the cross-listing quarter. Stocks with greater institutional ownership upon cross-listing see more liquid U.S. trading. Additionally, firms with a higher abnormal price run-up in the year prior to cross-listing and firms that see more liquid domestic trading enjoy greater post-listing liquidity in the U.S. Chapter 4 examines the asset allocation decisions of mutual fund investors, focusing on flight to quality considerations. Using the default spread, term spread and short term interest rate as proxies for economic conditions, we find that an expected improvement (deterioration) in Canadian economic conditions causes investors to direct flow away from (towards) fixed income-type funds and towards (out of) equity based funds. For example, a one standard deviation increase in the term spread (1.13%) results in an 84% increase and a 74% decrease in the percentage of flow directed at Canadian equity and money market funds respectively, relative to the previous month. / Finance

Submitted by Lira Rocha da Mota (lrmota@fgvmail.br) on 2014-04-11T16:09:48Z No. of bitstreams: 1 dissertacao.pdf: 1327836 bytes, checksum: d45aace450f509fb8a98c97ff86e3225 (MD5) / Approved for entry into archive by ÁUREA CORRÊA DA FONSECA CORRÊA DA FONSECA (aurea.fonseca@fgv.br) on 2014-04-25T19:49:33Z (GMT) No. of bitstreams: 1 dissertacao.pdf: 1327836 bytes, checksum: d45aace450f509fb8a98c97ff86e3225 (MD5) / Approved for entry into archive by Marcia Bacha (marcia.bacha@fgv.br) on 2014-05-08T13:41:20Z (GMT) No. of bitstreams: 1 dissertacao.pdf: 1327836 bytes, checksum: d45aace450f509fb8a98c97ff86e3225 (MD5) / Made available in DSpace on 2014-05-08T13:41:34Z (GMT). No. of bitstreams: 1 dissertacao.pdf: 1327836 bytes, checksum: d45aace450f509fb8a98c97ff86e3225 (MD5) Previous issue date: 2013-12-23 / We report the results of an exploratory data analysis of the Brazilian securities lending market. The analysis is performed over the full historical data set of each individual loan offer and loan contract negotiated between January 2007 and August 2013. We give a quantitative description of volume and loan fee trends and fee dependence on asset characteristics. We also unveil new stylized facts specific to the Brazilian market on market access asymmetries between different types of investors. The emerging picture is that the Brazilian securities lending market is a complex environment with specific frictions and strong asymmetries among players. In particular, we describe a tax arbitrage operation performed by domestic mutual funds which generates a significant distortion in the data. In one such event, we estimate additional aggregate profits of 24.25 million Reais (around 10 million Dollars).

In the first essay, we study mutual funds' voting on compensation-related proposals initiated by corporate management. Compared with proposals on other topics, proposals on compensation issues are more likely to be challenged by mutual funds. Consistent with active institutional influence, mutual funds are more likely to vote against management at portfolio firms that make more excess CEO pay or depict other symptoms of poor governance such as bad performance and CEO entrenchment. Both active and passive funds' votes are significant drivers of the voting outcome of a proposal. Failed proposals are associated with lower CEO pay, especially excess pay, in the following year. Say-on-pay proposals opposed by more mutual funds are also followed by lower excess CEO pay. Collectively, evidence in this paper suggests that institutions (including passive institutions) play an important role in setting CEO pay through the voting channel. The second essay examines the equity loan supply for short selling. Using detailed stock lending data, we show that active equity funds, on average, are informed, stock lenders. The stocks they lend outperform those that they do not. The stocks they recall and sell perform worse in the future than those that remain on loan. These funds avoid lending stocks when lending fees are extremely high and use the shorting market's signals to form stock-selling decisions. Our findings help explain why institutional investors lend stocks. They also highlight a new source of short-sale constraints arising from the informed loan supply. / Doctor of Philosophy / Shareholders of a firm are expected to monitor executive compensation. Among all share-holders, institutional investors such as mutual funds play an important role in setting pay practices for executives. However, do they vote on related proposals at annual meetings or simply "vote by feet"? The first essay strives to answer the question using mutual fund proposal vote records data. Our findings suggest that mutual funds can affect CEO compensation in the future by voting against management-initiated pay proposals and the effect is both statistically and economically significant. Institutional investors such as mutual funds also participate in lending business on otherwise idle shares in their portfolio. While they are often considered passive and not informed in the equity loan market, their behavior has been much less investigated. We study the extent to which mutual funds exploit information in lending their shares using the first detailed stock lending dataset obtained from SEC filings. We find that mutual funds are informed lenders and important to market efficiency.

The thesis addresses two areas of research within financial economics: empirical asset pricing and the borderline area between finance and economics with emphasis on econometrical methods. The empirical asset pricing section considers the effects of short-sale constraints on both the stock market as well as the derivatives market. Many arbitrage relations in the economy are intimately tied to the possibility to go short. One such arbitrage relation is the put-call-parity (PCP) relation that dictates a pricing relation between several derivative instruments and their underlying assets. During the latter part of the 1980s stock options could be traded in Sweden, while at the same time shorting was not permitted. The main contribution of the paper is to show that this shorting prohibition indeed implied larger deviations from PCP. Furthermore, this effect is only relevant for firms with stocks that were not shortable abroad, as firms with stocks shortable abroad did not show any deviations from PCP. The second paper investigates the asymmetries found in the momentum effect. Previous studies have found that the momentum effect is mostly due to the fact that a portfolio of loser firms tend to continue perform poorly, rather than because a portfolio of winner firms continue to do well. The explanation for this phenomenon investigated in the paper is based on the theoretical work by Diamond and Verrecchia (1985). In this model they demonstrate that the effects of restrictions on the ability to go short will have as a result that negative news are incorporated more slowly than positive news. The main contribution of my paper is to explore this hypothesis, and provide a link to the momentum effect. This has been achieved by considering Sweden during the 1980s during which the rare situation of a complete shorting prohibition was enforced. The second section of the thesis foremost addresses the CCAPM model. In the third paper the joint effect of market frictions, different utility specifications, as well as more stringent econometrical analysis, on the CCAPM are considered. Since all these remedies tend to co-exist and should not be considered on a stand alone basis, as has been the case in the previous literature. The paper also shows how several measures of misspecification available in the literature are implemented when market frictions are present. In particular, the paper presents the Hansen and Jagannathan measure with market frictions. The final paper considers L1-norm-based alternatives to the L2-norm-based Hansen and Jagannathan (1997) measure. It is well known that L1-norm methods may show good properties in the presence of non-normal distributions, for instance, with respect to heavy-tailed and/or asymmetric distributions. These methods provide more robust estimators, since they are less easily influenced by outliers or other extreme observations. The basic intuition for this is that L2-norm methods involve squaring errors, which magnifies large deviations, while L1-norm methods are based on absolute deviations. Since financial data are known to frequently display non-normal properties, L1-norm methods have found considerable use in financial economics. / Diss. Stockholm : Handelshögskolan, 2005