This dissertation contains two essays in empirical finance. The first essay studies the mutual fund industry, and the second essay looks into the stock market. Both studies provide insights in the underlying mechanism of some asset return patterns identified from the data currently available. The first essay investigates the sources of a recently identified performance pattern in mutual funds. Specifically, actively managed mutual funds, in general, underperform a passive benchmark; however, some recent studies find they, in fact, outperform the benchmark in bad economic states. I examine whether a state dependent risk shifting behavior of mutual fund managers contributes to this performance difference across states, and find supportive evidence. As shown in prior studies, the risk shifting behavior is motivated by a non-linear flow-performance relationship. Using a piece-wise linear regression, I demonstrate that the non-linearity exists mainly in good states; whereas in bad states, the flow-performance relationship is close to linear. Thus, non-zero risk shifting incentives are only expected in good states. I empirically measure these incentives in good states, and show that managers do react to the ``gambling'' (i.e., positive) incentives. In addition, higher ``gambling'' incentives are found to be associated with lower fund performance. The second essay, based on joint work with Hai Lu and Kevin Wang, examines how stock price shocks in the absence of public announcement of firm specific news affect future stock returns. We find that both large short term price drops and hikes are followed by negative abnormal returns over the subsequent twelve months. The pattern of asymmetric drifts, the return continuation for negative shocks versus the return reversal for positive shocks, is puzzling. We explore whether investor disagreement can explain the puzzle and find that the evidence is consistent with predictions of disagreement theory. Moreover, price shocks with public news disclosures are followed by weaker drifts, suggesting that reduction of information asymmetry from public disclosures mitigates disagreement-induced overpricing.

This dissertation contains two essays in empirical finance. The first essay studies the mutual fund industry, and the second essay looks into the stock market. Both studies provide insights in the underlying mechanism of some asset return patterns identified from the data currently available. The first essay investigates the sources of a recently identified performance pattern in mutual funds. Specifically, actively managed mutual funds, in general, underperform a passive benchmark; however, some recent studies find they, in fact, outperform the benchmark in bad economic states. I examine whether a state dependent risk shifting behavior of mutual fund managers contributes to this performance difference across states, and find supportive evidence. As shown in prior studies, the risk shifting behavior is motivated by a non-linear flow-performance relationship. Using a piece-wise linear regression, I demonstrate that the non-linearity exists mainly in good states; whereas in bad states, the flow-performance relationship is close to linear. Thus, non-zero risk shifting incentives are only expected in good states. I empirically measure these incentives in good states, and show that managers do react to the ``gambling'' (i.e., positive) incentives. In addition, higher ``gambling'' incentives are found to be associated with lower fund performance. The second essay, based on joint work with Hai Lu and Kevin Wang, examines how stock price shocks in the absence of public announcement of firm specific news affect future stock returns. We find that both large short term price drops and hikes are followed by negative abnormal returns over the subsequent twelve months. The pattern of asymmetric drifts, the return continuation for negative shocks versus the return reversal for positive shocks, is puzzling. We explore whether investor disagreement can explain the puzzle and find that the evidence is consistent with predictions of disagreement theory. Moreover, price shocks with public news disclosures are followed by weaker drifts, suggesting that reduction of information asymmetry from public disclosures mitigates disagreement-induced overpricing.