In this dissertation, I consider a range of topics in investment and risk management. I seek to understand several existing yet puzzling phenomena from a theoretical perspective. In the first chapter, we study the optimal insurance demand of a risk- and ambiguity-averse consumer if contract nonperformance risk is perceived as ambiguous. Ambiguity lowers optimal insurance demand and the consumer's degree of ambiguity aversion is negatively associated with the optimal level of coverage. Biased beliefs and greater ambiguity may increase or decrease the optimal demand for insurance, and we determine sufficient conditions for a negative effect. We also discuss wealth effects and evaluate the robustness of our results by considering several alternative models of ambiguity aversion. Our findings show how ambiguous nonperformance risk can undermine the functioning of insurance markets, making it a concern for regulators. Caution is required though because, as we show, demand reactions are only imperfectly informative about the welfare effects of nonperformance risk. In the second chapter, we address an ongoing debate on pension investment policy: should defined-benefit corporate pension plans invest aggressively in risky securities or completely de-risk their assets? In our model, firms maximize shareholder value subject to the participation constraint of employees, who are wealth-constrained and are partially exposed to pension investment risk via a corporate bankruptcy channel and a pension surplus sharing channel. For a reasonable set of parameter values, the model-suggested optimal pension allocation to risky assets exceeds 50%. The level of pension risk-taking predicted by the model, and its relation with a firm's bankruptcy probability and pension funding ratio, match with empirical observations. We show that due to limited sharing of the investment risk by employees. Defined-benefit pensions may take on even more risk than what employees choose in the defined contribution plans. Further, firms may substantially reduce their overall pension funding costs under an alternative arrangement in which employees bear all the systematic pension investment risk. This is consistent with the secular trend of firms switching from defined benefit plans to defined contribution plans. In the third chapter, I model the shadow banking mechanism and discusses its functionality of risk sharing and its impact on financial instability. In equilibrium, the shadow banking becomes more active when investors perceive higher expected returns from the capital market. The shadow banking yield arises when the capital market gets more volatile. Lower interest rates from regulated banks encourage the shadow banking and the magnitude of impacts depends on investors' aggregate risk preference. Overactive shadow banking activities can “cool down” themselves. The shadow banking's influence over the economy is twofold: it improves the overall welfare of heterogeneous agents by risk sharing, but it spreads the risk through the financing channel, which makes the savers more vulnerable to the negative shocks in financial markets.

In this dissertation, I address two main topics regarding mutual fund. One is performance persistence in general, and the other is conflict of interest for investment bank-affiliated mutual funds. The first chapter examines the concentration of active mutual fund managers' research efforts toward information-intense stocks and the degree to which they are successful in such efforts. We show that funds that hold stocks with high information intensity exhibit large performance dispersion, indicating that both skilled and unskilled fund managers are attracted to such stocks. Moreover, the performance of these funds is predictable by fund skill proxies such as past fund alphas, and the well-known phenomenon of performance persistence is only observed among funds with high information intensity. The effect of fund information intensity on performance persistence is robust to the control of characteristics of fund holdings such as market cap, illiquidity, and return volatility, and is different from the effect of existing measures of fund activeness. Finally, information intensity increases fund flow sensitivity to past performance. These findings suggest that, with costly information production, information intensity is an important dimension of active investment decisions by fund managers and an important dimension of fund selection decisions by investors. The second chapter examines the conflict of interest in IPO share allocations by investment banks and by fund management companies. Affiliated mutual funds successfully avoid cold IPOs. However, they are “crowded out” of hot IPOs -- the IPO shares they do receive are inversely related to the hotness of the IPOs. Within affiliated fund families, funds with larger size, higher expense ratio, and higher past returns are more likely to receive IPO shares. However, these funds receive less allocations for hotter IPOs. Overall, my findings present a more complicated picture to the conflict of interest in IPO share allocations than suggested by prior studies. The third chapter examines the relation between mutual fund turnover and performance persistence. Existing studies have reported mixed empirical relations between portfolio turnover and mutual fund performance. This paper documents strong heterogeneity in the turnover-performance relation, which helps reconcile the contrasting evidence in prior studies. While there is no significant relation between turnover and fund performance on average, performance is particularly dispersed among high-turnover funds. Further, performance persistence is much stronger among funds with higher turnover. These findings are consistent with the notion that turnover is persistently and positively related to performance for some fund - possibly due to the fact that turnover is driven by available investment opportunities, while persistently and negatively related to performance for other funds - possibly due to high trading costs associated with high turnover. Finally, we find that the relation between turnover and performance persistence is largely a cross-sectional effect, not a time-series effect.

The hub location problem seeks to find the best location for hubs and the assignment of non-hub nodes to hubs. The resulting structure is a hub-and-spoke network. In this dissertation, we study the hub location problem within the context of three different application areas. We first consider the air travel industry, where many airline companies (especially the legacy airlines) operate hub-and-spoke networks. Important considerations in designing such a hub-and-spoke network are the cost of establishing the hubs, the cost of transporting passengers through the network, and the operating costs and maximum flying ranges of the different aircraft types in the fleet. We introduce the hub covering flow problem, which accounts for all these design considerations. We next look at time-definite delivery services in the small package delivery industry, where a customer's package is guaranteed to be delivered within a certain time-window. With possible delays along the transportation route, a package may not be delivered on time. We introduce the stochastic p-hub center problem, which seeks to design a network where the longest origin-destination path in the network is minimized. The solution provides an upper bound on the delivery times, which can be used to design time-constrained service offerings, or to ascertain if current service guarantees are feasible. A service-level constraint is included into the model to ensure a high likelihood of on-time delivery. In communication networks, two important service-level considerations are robustness (the ability of the network to perform when components become unavailable) and response time (the time required to transfer information through the network). We propose another version of the stochastic p-hub center problem, which employs a two-stage stochastic programming formulation, that addresses the possibility of unavailable components or transmission delays in the network.

This thesis studies a range of topics in empirical corporate finance, and consists of three essays. The first essay is sole-authored and is titled ‘The Value of Social Networks during Periods of Distress.' The second essay ‘The Role of Investment Banker Directors in M &A: Can Experts Help?' is a joint work with Feng Jiang, Erik Lie, and Ke Yang. The third essay is titled ‘Acquisitions of Financially Distressed Firms: An Empirical Analysis' and is coauthored with Feng Jiang. In the first essay, I examine the impact of social networks during (i) a financial crisis, (ii) industry downturns, and (iii) periods when firms are in financial distress. I find that socially well-connected firms exhibit better performance during the financial crisis of 2007-2009. Well-connected firms have better access to debt financing during the crisis, and this is especially true among financially constrained firms. During industry downturns, firms with more social connections also perform better. When firms become severely financially distressed, I find that personal connections to lenders reduce the probability of filing for bankruptcy and increase the likelihood of getting Debtor-in-Possession financing if they nevertheless have to file. Overall, the results suggest that social networks benefit firms in times of distress. In the second essay, we examine how directors with investment banking experience affect firms' acquisition behavior. We find that firms have a higher probability of acquisition when an investment banker is a director. Furthermore, acquirers with investment banker directors on the board have significantly higher announcement returns, especially if the deal is relatively large and the bankers' experience and/or network is current. We also find evidence that investment banker directors help reduce the takeover premium and advisory fees paid to outside consultants. Finally, the presence of investment banker directors is positively related to long-run operating and stock performance. Lastly, in the third essay, we study acquisitions of distressed targets. We find distressed acquisitions are usually associated with debt restructuring of the target debt, and the deals can be implemented with or without the aid of the bankruptcy court. We find target stakeholders generally prefer to complete the acquisition without court help, unless the hold-out problem that resides in debt structures would jeopardize a deal outside of Chapter 11. Firms that choose to be acquired within Chapter 11 are found to have more debt contracts outstanding and more public debt. We also find that target CEOs are more likely to retain their jobs following non-bankruptcy acquisitions or pre-negotiated acquisitions than in post-negotiated acquisitions, consistent with our conjecture that management benefits personally from arranging a sale as a resolution to the financial distress of the firm.

In this dissertation, I consider a range of topics in cross-sectional asset pricing. The primary research focus is twofold. First, I provide new insights on analyzing and testing capital market "anomalies" or patterns in equity returns that are not well explained by the traditional models used in the finance literature. Second, I propose and examine a methodology for pooling asset-pricing models to better characterize the cross section of stock returns. The first chapter offers an explanation for the financial distress anomaly, i.e., the previously documented poor stock-price performance for financially distressed firms. I first show that market betas for distressed firms are highly volatile and tend to be low during bad economic times. After properly controlling for exposure to market risk, the low historical returns on these stocks are consistent with the conditional Capital Asset Pricing Model (CAPM). I then explain these findings through a theoretical model in which a levered firm's equity beta is negatively related to uncertainty about the unobserved value of its underlying assets. Empirical tests support the main predictions of the theory. The second chapter proposes a hierarchical Bayes approach for evaluating and testing asset-pricing anomalies using individual firms as test assets. The empirical results indicate that much of the anomaly-based evidence against the CAPM is overstated. Anomalies are primarily confined to small stocks, few characteristics are robustly associated with CAPM alphas out of sample, and most firm characteristics do not contain unique information about abnormal returns. Lastly, the third chapter proposes a new econometric methodology to combine predictive densities from a set of competing asset-pricing models to better characterize the cross section of stock returns. Using a variety of test portfolios, the optimal pool of models consistently outperforms the best individual model on both statistical and economic grounds.

In the early 2000s, the Securities and Exchange Commission (SEC) called on firms to provide new MD &A disclosures about their critical accounting estimates. The new disclosures outline how reasonably likely changes in firms' highly uncertain accounting estimates would affect earnings. Because the new disclosure practice potentially highlights accrual estimates with a reduced level of reliability (i.e. greater estimation error) arising from uncertainty in the accrual measurement process, I examine whether the presence of a critical accounting estimate (CAE) disclosure partially explains cross-sectional variation in the value relevance of balance sheet items. Using a sample of non-financial and non-utility S &P 500 firms from 2004 to 2009, I find the value relevance of a balance sheet item is negatively associated with the presence of a related CAE disclosure. To corroborate my value relevance findings, I also examine whether the predictive value of accruals with respect to future cash flows and accrual noise, which are two accounting-based characteristics of useful accounting information, are associated with the presence of a CAE disclosure. I find the incremental predictive value of accruals with respect to future cash flows (accrual noise) is negatively (positively) associated with the presence of a CAE disclosure. Overall, these results suggest investors perceive balance sheet items accompanied by a related, account-specific CAE disclosure to have lower reliability, and consistent with investors' perceptions, accrual estimates have less predictive value and are noisier when these disclosures are present. Other findings indicate that the magnitude of estimation error and disclosure complexity play a role in the extent to which investors reduce their reliability perceptions in the presence of a CAE disclosure.

This thesis consists of three chapters. The first chapter is sole-authored and is titled `Cross-border mergers and acquisitions amid political uncertainty.' The second chapter is coauthored work with Professor Jon Garfinkel and Jaewoo Kim and is titled `The interactive influence of external and internal governance on risk taking and outcomes: The importance of CEO career concerns.' The third chapter is coauthored work with Professor Erik Lie and Jaewoo Kim and is titled `Dividend stickiness, debt covenants, and earnings management.' First chapter examines the effects of political uncertainty surrounding national elections on cross-border mergers and acquisitions. I find that the volume of cross-border mergers and acquisitions between two countries declines before elections in the target country. Firms in industries that are more dependent on the quality of contract enforcement, labor, and government spending are less likely to be acquired during election years. In a cross-border merger deal announced during the target country's election year, acquirers tend to offer a lower bid premium, and the likelihood of an all-cash offer is significantly lower. The acquirer captures a greater fraction of merger gains relative to the target in such a deal. Overall, my findings suggest that political uncertainty importantly affects multiple aspects of cross-border mergers and acquisitions. Second chapter studies the effects of multi-layered governance on firm risk by focusing on the interaction of two types of career concerns. Two Delaware court decisions, the validation of poison pill defenses (the Unitrin decision) implemented by staggered boards (the Wallace decision), reduced takeover-related career concerns. CEO age influences the response of Delaware firms to these shocks. Older CEOs in newly insulated firms reduce risk, while their younger counterparts increase risk. Ex-post, the differential behavior among young Delaware CEOs appears to be rewarded with abnormally positive stock performance and better future career outcomes. We conclude that there is important variation in the effects of governance on firm (CEO) behavior, driven by multiple facets of career concerns. Third chapter examines dividend stickiness. Consistent with the notion that dividends are very sticky, Daniel, Denis, and Naveen (2008) report evidence that firms manage earnings upward when pre-managed earnings are expected to fall short of dividend payments. However, we find that this evidence is not robust when controlling for firms' tendency to manage earnings upward to avoid reporting earnings declines. We further report that the decision to cut dividends depends on whether reported earnings fall short of past dividends, but not on earnings management that eliminates a shortfall in pre-managed earnings relative to dividend payments. Overall, our evidence suggests that firms that face dividend constraints are more likely to cut dividends than to manage earnings to avoid dividend cuts.

The association between customer satisfaction and customer loyalty is one of the most central relationships for marketing theory and practice. To improve our understanding of this essential relationship in marketing, we develop a comprehensive and flexible theoretical framework for analyzing the association between customer satisfaction and customer loyalty, which simultaneously incorporates heterogeneity in the possible dimensions of competitive settings. This theoretical framework is grounded by more than 40 years of academic and practitioner research on the association between these two constructs, which allows us to more precisely examine the true nature of the association between satisfaction and loyalty by incorporating competitive setting heterogeneity. In addition, we test our theoretical framework by estimating a 3-level empirical hierarchical linear model, using American Customer Satisfaction Index data and several customer, firm and industry characteristics. Our findings indicate that the true nature of the association between satisfaction and loyalty is significantly influenced by competitive setting differences. Accounting for such differences allows firms and managers to significantly increase their ability to effectively convert satisfaction investments into loyalty. Also, we identify important trade-offs between the intercept and slope of the association between the two metrics, indicating that firms' incentives to invest or not in satisfaction differ dramatically across industries. Depending on the shape of their satisfaction-loyalty curve, firms can obtain a certain level of loyalty by indirectly choosing how much to invest in satisfaction. Therefore, customer satisfaction must be treated as an endogenous variable. In our subsequent analysis, we control for both satisfaction endogeneity and competitive settings heterogeneity using a Two-Stage Least Squares 3-level hierarchical linear model, correcting the standard error estimates via a jackknife procedure. This research provides precise, important theoretical and managerial insights, and broadens our understanding of the essential features of the satisfaction-loyalty relationship.

This research seeks to advance our understanding about potential sources of error arising from key decisions when conducting new product concept tests. My particular focus is on research design decisions including respondent selection (younger vs. older), information type (attribute vs. benefit) and presentation format (verbal vs. visual) and how their decisions influence respondents’ evaluations of new product concepts during concept tests. Importantly, I draw on construal level theory (CLT) to demonstrate that decisions in these three areas influence respondents’ reactions to new product concepts in an interactive rather than independent manner. A key implication is that design decisions in concept testing lead to acceptance and rejection of product concepts independent of the inherent characteristics of the concepts themselves. Therefore, this research identifies potential sources of error not yet identified in the marketing literature. Furthermore, I provide prescriptions for overcoming the identified limitations. For example, I draw on CLT to explain challenges older respondents face when evaluating “attribute only” concept statements. The findings in this research suggest thst when product managers conduct “attribute only” product concept tests with older adults, they should consider the inclusion of design factors such as images and instructions that promote a more concrete processing style.

Managers are constantly making ethical decisions whether consciously or tacitly. The primary purpose of this study was to determine if certain organizational and personal strategic decisions would cause decision makers to act more or less ethically. Additionally, this study was to ascertain if changes or turbulence in the organizational environment would cause managers to act less ethically. Finally, this study sought to reveal if any demographic characteristics of the decision maker would be pertinent in predicting decision making patterns of managers. Using a questionnaire which consisted of four vignettes which depicted actual business situations, data was collected from 171 managers. The results definitely confirmed that managers will vary their level of ethical response when the strategic issues change and/or environmental turbulence increases. The reasons for these changes were primarily issues of organizational survival, personal job enhancement, and personal economic survival. Thus, some degree of ethical elasticity was confirmed. While statistically significant supporting evidence was not revealed for the influence of demographic variable, the results did indicate that gender and age could be factors. No significant interactions were revealed. / Source: Dissertation Abstracts International, Volume: 53-03, Section: A, page: 0876. / Major Professor: Tim Matherly. / Thesis (Ph.D.)--The Florida State University, 1992.