This dissertation studies empirical corporate finance problems related to financial intermediation. The dissertation is composed of three chapters. The first chapter exploits a natural experiment to quantify how much consumer credit borrowers are willing to pay for a good credit reputation. A department store in Chile offered its delinquent borrowers whose balance was higher than an arbitrary cutoff a renegotiation that reduced the monthly payment due required to appear in good standing to other lenders through a credit bureau. Using the variation induced by the cutoff in a fuzzy regression discontinuity design, I find that borrowers repay 10% of their monthly income to have a good credit reputation for 6 to 8 months. Even though previous work has documented the effect of reputational mechanisms on repayment behavior, this is the first paper that quantifies the value of a good credit reputation. The second chapter focuses on the same group of borrowers as the first chapter and analyzes how the renegotiation campaign, which can be understood as a market for credit reputation, may introduce an inefficiency in consumer credit markets. I obtain an individual-level dataset of Chilean bank debt data, which I match to the department store data with the use of the unique national tax identifier. Because borrowers who renegotiate at The Store are indistinguishable from other borrowers in good standing in the credit bureau, other lenders may end up with a less creditworthy pool of borrowers. Thus, renegotiation may impose a negative externality that has not been previously studied in the literature. Indeed, I document that banks increase their lending to borrowers whose balance is above the cutoff, that is, who were affected by the renegotiation campaign, relatively more than borrowers below the cutoff who were unaffected by it. Further, I find evidence consistent with a potential externality, as borrowers whose balance is above the cutoff default more and in higher amounts after the renegotiation campaign relative to borrowers whose balance is below the cutoff. I discuss some policy implications of this result. Finally, the third chapter, co-authored with Emily Breza, studies the effect of the provision of trade credit on the contracting outcomes of a large client and its suppliers. We exploit a regulation change that reduced from 90 to 30 the number of days a large supermarket chain in Chile could wait to pay its suppliers. The regulation serves as a natural experiment as it was only binding for small suppliers, defined as those firms whose yearly revenues were less than an arbitrary cutoff. Focusing on a narrow window of firms with yearly revenues around the cutoff, we find that small suppliers sell their products at prices 5%-10% lower than large suppliers after the regulation change. We also provide suggestive evidence to isolate the mechanisms through which trade credit (or a lack thereof) affect market outcomes. These results help evaluate the tradeoffs small firms face when negotiating trade credit terms with large clients.

This dissertation analyzes the role of institutional investors in capital markets. The first essay studies what affect mutual fund decisions on hiring and firing sub-advisors and the ex-post effects. We show that deterioration in mutual fund performance or increase in outflows predicts a higher propensity of a fund to change its sub-advisors. However, mutual funds continue to underperform by about 1% in the 18-months after a change in sub-advisor, even after controlling for fund category, past returns and past flows. The continuing underperformance of mutual funds can be attributed to decreasing returns for sub-advisors in deploying their ability as suggested in Berk and Green (2004). The second essay provides empirical analysis on hedge fund exposures to overpriced real estate assets. Consistent with models in which delegated portfolio managers may want to invest in overpriced assets, I find that hedge funds were holding real estate stocks instead of selling short during the period of overpricing (2003Q1-2007Q2). The third essay finds that investor composition affect fund managers' portfolio choices. Specifically, I show that retail-oriented hedge funds invested more in overpriced real estate assets than institution-oriented hedge funds.

This dissertation consists of three chapters related to issues in corporate credit. The first chapter studies whether credit rating agencies applied consistent rating standards to U.S. corporate bonds over the expansion and recession periods between 2002 and 2011. Based on estimates of issuing firms' credit quality from a structural model, I find that rating standards are in fact procyclical: ratings are stricter during an economic downturn than an expansion. As a result, firms receive overly pessimistic ratings in a recession, relative to during an expansion. I further show that a procyclical rating policy amplifies the variation in corporate credit spreads, accounting for, on average, 11 percent of the increase in spreads during a recession. In the cross section, firms with a higher rollover rate of debt, fewer alternative channels to convey their credit quality to the market, and firms that are more sensitive business to economic cycles are more affected by the procyclical rating policy. The second chapter quantifies the causal effect of borrowing cost on firms' investment decisions. To overcome the empirical challenge due to a possible reverse causality where firms' investment prospects affect their borrowing costs, I apply an instrumental variable methodology where the identification comes from insurance companies' regulatory constraints regarding the credit rating of their bond holdings. Rating-based regulatory constraints are more binding for insurers with a weaker capital position. For this reason, bonds upon downgrades face different degrees of selling pressure depending on the different capital positions of their holders. Such differences are presumably not correlated with issuers' investment prospects. Using data from 2004-2010, I estimate that a one percentage-point increase in bond spread reduces investment during the same year by 12 percent. Moreover, a five percentage-point increase in bond spread halves the probability of new debt issuance. Finally, in the third chapter, when the bankruptcy code protects the rights of lenders, I and my co-author Suresh Sundaresan show that there is no intrinsic reason to issue debt with safe harbor provisions. When the code violates APR or results in significant dead-weight losses, the optimal liability structure includes secured short-term debt, with safe harbor protection. The borrower is able to trade off between "run prone" safe harbored short-term debt and long-term debt depending on the inefficiencies in bankruptcy code, and the availability of eligible collateral to increase the overall value of the firm. The presence of a secured short-term debt will increase the spread of long term debt, and this reduces the long-term debt capacity of firms. Overall, the combined debt capacity increases for the firm. Using the onset of credit crisis in 2007 as an exogenous adverse shock to the collateral value of assets and to the riskiness of collateral, we find that the leverage and short-term debt of financial firms fell much more rapidly than non-financial firms due to the greater exposure of financial firms to "run risk". The provision of short-term credit by the Fed is shown to significantly buffer the reduction in short-term debt and leverage of financial firms, supporting the presence of a supply (of credit) effect in the data. While the Fed's intervention resulted in credit spreads returning to the pre-crisis levels, there was still a net fall in the short-term debt and leverage of financial firms, suggesting a possible demand effect as well. These results are in broad conformity with the theory developed in our results.

The first essay examines whether risk is explained based on cash flow (CF) or discount rate (DR). Realized returns comprise (ex-ante) expected returns plus (ex-post) innovations, and consequently both expected returns and returns innovations can be broken down into components reflecting fluctuations in CF and DR. I use a present-value model to identify the CF and DR risk factors which are latent from the time series and cross sections of price-dividend ratios. This setup accommodates models where CF risk dominates, like Bansal and Yaron (2004), and models where DR risk dominates, like Campbell and Cochrane (1999). I estimate the model on portfolios, which capture several of the most common cross-sectional anomalies, and decompose the expected and unexpected returns into CF and DR components along both time-series and cross-sectional dimensions. I find that (1) the DR risk is more likely to explain the variations of expected returns, (2) the CF risk drives the variations of unexpected returns, and (3) together they account for over 80% of the cross-sectional variance of the average stock returns. The second essay develops a liability driven investment framework that incorporates downside risk penalties for not meeting liabilities. The shortfall between the asset and liabilities can be valued as an option which swaps the value of the endogenously determined optimal portfolio for the value of the liabilities. The optimal portfolio selection exhibits endogenous risk aversion and as the funding ratio deviates from the fully funded case in both directions, effective risk aversion decreases. When funding is low, the manager "swings for the fences" to take on risk, betting on the chance that liabilities can be covered. Over-funded plans also can afford to take on more risk as liabilities are already well covered and so invest aggressively in risky securities. The third essay introduces a methodology to estimate the historical time series of returns to investment in private equity. The approach is quite general, requires only an unbalanced panel of cash contributions and distributions accruing to limited partners, and is robust to sparse data. We decompose private equity returns into a component due to traded factors and a time-varying private equity premium. We find strong cyclicality in the premium component that differs according to fund type. The time-series estimates allow us to directly test theories about private equity cyclicality, and we find evidence in favor of the Kaplan and Strmberg (2009) hypothesis that capital market segmentation helps to determine the private equity premium.

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We examine the relationship between the share of ‘non-traditional’ members, such as African-Americans and women, present on a firm’s board of directors and firm value. We also explore the implications of the presence of non-traditional directors and sell-side analyst stock recommendations. Using data collected from Institutional Shareholder Services (ISS), publications such as Black Enterprise Magazine, the US Census, and internet searches, we assign ethnicities to board members of S&P 1,500 firms during 1996-2016. We find a convex relationship between the share of non-traditional directors and firm value: the share of non-traditional directors is negatively related to firm value at “token” levels of participation (no more than 15%); as the share of non-traditional directors moves beyond 25%, the total impact of non-traditional directors on firm value begins to turn positive. To address endogeneity concerns, we use the Sarbanes-Oxley Act and the Supreme Court 2003 Affirmative Action decision (Grutter v. Bollinger) as exogenous shocks to the supply and demand of non-traditional directors. Furthermore, we find non-traditional directors are more effective board members post-2003: their reduced board memberships, improved attendance record, and increased committee services may explain the enhanced impact of non-traditional directors on firm value after 2003. In a separate analysis, we find that firms with non-traditional board members are associated with lower analyst recommendations and a lower percentage of “buy” ratings on its stock. To address endogeneity concerns, we use an instrumental variable related to a firm’s board connectedness to non-traditional members on outside boards, and a diff-in-diff analysis of the addition of non-traditional directors to a firm’s board. We interpret our findings to suggest bias may exist in analyst recommendations associated with racial and gender diversity on boards of directors. / A Dissertation submitted to the Department of Finance in partial fulfillment of the requirements for the degree of Doctor of Philosophy. / Spring Semester 2019. / April 10, 2019. / Analysts, Board of Directors, Diversity, Firm Value / Includes bibliographical references. / Yingmei Cheng, Professor Directing Dissertation; Irene Padavic, University Representative; Baixiao Liu, Committee Member; Irena Hutton, Committee Member.

This dissertation consists of two independent essays on corporate finance. The first essay explores the trend in the profitability of U.S. firms, why it occurs and how firms respond to it. We document that the return on assets (ROA) of U.S. firms has decreased by about two-thirds from 1980 to 2015; the trend is pervasive across industries and firms with different characteristics. We argue that the inefficacy of corporate investment could be the driver behind the deteriorating profitability. We show that firms have been cutting investments in response to the poor investment efficiency. However, the current level of investment cut does not seem to offer a satisfactory solution. At the firm-level, we do not find evidence that a significant cut in total investments helps improve accounting performance of low-investment-efficiency firms; and at the market-level, the cost of capital (COC) has been consistently above ROA over the entire sample period. The second essay studies the role of CEO’s managerial ability in the firms’ choice of board leadership. Using a sophisticated measure of managerial ability, we show that whether the CEO is capable or not does not affect whether he/she will be awarded the board chairman position. In general, the firms’ choice of board leadership does not reflect the balance between the benefits and costs of dual leadership. These findings are in sharp contrast to the claim found in many companies’ CEO-chairman appointment announcement that the two positions are given to a person of high managerial ability and cast doubt on the validity of “the efficiency argument” of dual leadership. / A Dissertation submitted to the Department of Finance in partial fulfillment of the requirements for the degree of Doctor of Philosophy. / Spring Semester 2019. / January 9, 2019. / Includes bibliographical references. / James S. Ang, Professor Directing Dissertation; Anastasia Semykina, University Representative; Yingmei Cheng, Committee Member; Baixiao Liu, Committee Member.

Utilizing a new understanding of firm compliance responses to regulation, I find that Sarbanes-Oxley helped both identify and reduce abnormal returns to informed insider trading. The number of forms insiders file post-SOX increased by 175% per year, causing an 84% increase in firm compliance policies to handle the implicit costs to filing by selecting staff to oversee and orchestrate the trading of insiders. Insiders sign their own insider trading forms identify deviation from firm policy and signal informed insider trading reaping abnormal annualized returns to their purchases (sales) of 9.6% (-10.8%). Using this novel measure to identify informed insider trading, Sarbanes-Oxley cuts abnormal returns nearly in half. I find that SOX does so by limiting insiders’ ability to sequence smaller trades multiple times, a previously undisclosed strategy. Sarbanes-Oxley’s insider trading provisions work as intended—to limit insiders from using their informational advantages to lucratively trade—and it does so by increasing both the amount and speed of disclosure. Furthermore, firm insiders, as a subgroup of the top 1% in U.S. wealth and income, do not follow traditional theoretical savings motives. Using new data on individuals’ use of structured savings products (SSPs), I combine the literatures of individual savings motives and offshoring, which cannot explain the wealthy’s savings and lack strong theoretical motives, respectively. Wealthy individuals are driven by an unstudied motive—asset protection—with those most sensitive to this motive saving 25% more in SSPs, and, conditional on using SSPs, saving $589,660 more per year in these products when facing litigation risk. This relationship is causally identified using the staggered adoption of Domestic Asset Protection Trusts as an exogenous shock to the structured savings options of individuals. Tax avoidance, a motive from the literature on offshoring, provides little benefit to insiders—avoiding 0.076% of taxes—while individuals do not respond to exogenous changes in their tax environment. Bequest preferences, a motive from individual savings, predicts bequests to be at least 89.47% less than their empirically observed estates, leaving most of individuals’ savings unexplained. Moreover, individuals most sensitive to asset protection motives save 5.33 times more in bequest products that retain control over these savings, indicating savings earmarked for bequests may still be revoked. By examining a new motive for savings, asset protection, I unite the two previously separate literatures of individual savings motives and offshoring. / A Dissertation submitted to the Department of Finance in partial fulfillment of the requirements for the degree of Doctor of Philosophy. / Spring Semester 2019. / March 8, 2019. / Includes bibliographical references. / Irena Hutton, Professor Directing Dissertation; Anastasia Semykina, University Representative; Don Autore, Committee Member; Baixiao Liu, Committee Member.

Thesis (Ph. D.)--Ohio State University, 1982. / Includes vita. Includes bibliographical references (leaves 147-152). Available online via OhioLINK's ETD Center.

Established in 1957 by the Treaty of Rome, the European Union is now made up of 27 members and, as of 2009, accounted for about 30 percent of the gross world product. It began as a customs union between six countries, in an effort to rebuild and unite a war-torn Europe. Today it is an economic and monetary union with ambitions to become a political union. One of the key steps towards that level of unification is the free movement of capital across national borders. To that end the leaders of the EU have put large amounts of resources towards financially integrating the member states. This paper seeks to measure the level of financial integration of the long term government bond markets from 2002 to 2009. A market can be considered financially integrated if similar participants: first, follow a single set of rules when dealing with financial goods and services; second, have equal access to those goods and services; and third, are not discriminated against when they are participating in the market. Using the yields on the German bonds as a bench mark, yield spreads per quarter from 2002 to 2009 are calculated along with the variance of the yield spreads. The correlations between countries from 2002 to 2009 are also calculated to see how correlation changed over time. Countries that use the Euro were found to be the most integrated, followed by the countries with pegged currencies, and then the countries with free-floating currencies. Within each subsample, integration either increased or remained static from 2002 to 2006; after 2007, integration decreased.