One outcome of ever increasing competition and consolidation in the financial services industries has been the declining significance of the mutual organizational form in the U.S. life insurance industry. The process of converting from a mutual to a stock company gives rise to a variety of issues. The first three essays in this dissertation focus on the growing movement toward demutualization in the U.S. life insurance industry where essay one discusses industrial organization background. In essay two, I improve on the existing literature regarding the determinants of life insurer demutualizations by investigating an expanded data set and utilizing more robust econometric techniques to allow for different forms of demutualization. I also model the demutualization process as a two step process to account for the timing of demutualization, time-varying covariates, and censoring. These models yield results that strongly support the access to capital hypothesis. In essay three, I examine changes in risk management and investment strategies of demutualizing life insurers following conversion. The empirical tests reveal that demutualizing life insurers increase total risk after conversion consistent with their increased abilities and incentives for risk taking. They achieve this increase by hedging interest rate risk and increasing their core-business risks as proxied by investments in various illiquid asset classes. The final essay is on diversifying mergers and acquisitions. Conventional wisdom suggests diversification reduces risk. However, the change in the riskiness of the firm after diversifying acquisitions has not been directly tested in the literature. Using a sample of diversifying M&As, I find that total firm risk does not decrease significantly after these transactions. I then show that while total firm risk does not change, core-business risk increases significantly after the diversifying M&A transactions. I also find that capital expenditures in the acquirers’ core business segments increase significantly more after diversifying transactions relative to that of non-diversifying transactions. Overall, the evidence in this essay adds to the risk management literature that says hedging is a means of allocating risk rather than reducing risk and offers an alternative explanation for why firms diversify.

This paper examines the impact of CEO turnover from an internal capital allocation perspective. We test whether new CEOs make different divisional investment decisions than their predecessors, and if yes, how would this difference affect firm performance. We find that segment investments respond to factors, such as segment investment opportunity, segment cash flow, and other segments’ cash flows, differently after CEO turnover. Evidence also indicates that new CEOs adjust the segments’ previous over-investment /under-investment status to match industry average investment level, and they adjust the relative investment preference among divisions. These findings support the argument that different CEOs have their own set of skills and incentives, which directly affect their internal capital allocation decisions after they take over the office. We also examine the affiliation relationship between certain divisions and new CEOs, and find that new CEOs do not make capital allocation in favor their affiliated divisions. Furthermore, the analyses on firm-level internal capital allocation sensitivity do not support the literature about positive relationship between firm performance and the “Q-sensitivity”. But, our analyses do find a positive and robust relationship between changes in firm performance and changes in the “cash flow-sensitivity”. This suggests that new CEOs making internal capital allocation in favor of their “cash cow” segments are more likely to improve firm performance after CEO turnover.

Essay 1: The Determinants of the Convexity in the Flow-Performance Relationship There is substantial evidence that the flow-performance relationship of mutual funds is convex. In this work, I empirically investigate the determinants of such convexity. In particular, I study the impact that fund fees (marketing and non-marketing fees) and the uncertainty related to the replacement option of fund production factors (managerial ability and investment strategy) have on the convexity of the flow-performance relationship. I also analyze the impact of the priors about managerial ability and idiosyncratic risk on such convexity. The evidence suggests that marketing fees are positively related to the convexity of the flow-performance relationship. In addition, non-marketing fees do not have a negative impact on this convexity. The evidence associated with the value of the managerial and investment replacement option is mixed. Consistent with investment restrictions being relevant in explaining investors’ allocation decisions, sector, index, and hedge funds exhibit lower convexity in their flow-performance relationship than respectively diversified, non-index, and mutual funds. Finally, the dispersion of the priors about managerial ability and idiosyncratic risk are positively related to the convexity in the flow-performance relationship. Essay 2: Implicit Incentives and Tournament Behavior in the Mutual Fund Industry The convexity of the flow-performance relationship in the mutual fund industry produces implicit incentives for mutual fund managers to modify risk-taking behavior as a function of their prior performance (Brown, Harlow, and Starks (1996)). Rather than focusing only on tournament behavior, I investigate the link between the determinants of the convexity in the flow-performance relationship and the inter-temporal risk-shifting behavior of a fund’s manager. Hence, I examine how the sources of implicit compensation incentives shape tournament behavior. The evidence indicates that the relationship between changes in managers’ relative risk choices and mid-year performance is non-monotonic (U-shaped). Higher convexity in the flow-performance relationship increases the convexity of the U-shaped tournament behavior. For extreme performers, an increase in the convexity of the flow-performance relationship directly translates into higher risk-taking incentives. For average performers, the incentive to increase risk produced by the convexity in the compensation schedule is counterbalanced by an increase in the risk of termination. I find that the uncertainty about managerial ability, marketing efforts, and the size of family complexes affect the convexity of the U-shaped tournament behavior. These results are robust to the consideration of termination risks due to funds’ organizational form, investment objectives, or past performance. My results suggest that the risk strategies of younger funds, funds spending more on marketing, funds belonging to smaller families, sector funds, funds that are team-managed, or funds that have experienced consistent poor performance are more sensitive to intermediate performance.

ABSTRACT MANAGERIAL INCENTIVES AND TAKEOVER WEALTH GAINS By EBRU REIS DECEMBER 5, 2006 Committee Chair: Dr. Jayant R. Kale Major Department: Finance This study examines the relationship between managerial equity incentives and takeover wealth gains both for target and acquirer firms. Although there is some research about the effect of acquirer managers’ incentives on acquirer wealth gains, this paper is one of the first to investigate the effect of target managers’ incentives on the wealth effects of target firms in corporate takeovers. In addition, prior research has focused on the alignment effect of equity incentives in takeovers. However, takeovers provide an opportunity to liquidate personal equity portfolio for managers who hold an undiversified portfolio of their firms’ stock. In this study, I identify two hypotheses that potentially explain the effect of target managers’ incentives on wealth gains. While incentive alignment hypothesis predicts a positive relationship, diversification driven-liquidity hypothesis predicts a negative relationship between target managerial incentives and target wealth gains. I use a sample of 656 successful and 104 failed acquisitions over the period 1994-2003 to test these competing hypotheses. I find that for targets that are less (more) diversified, equity incentives are negatively (positively) related to wealth effects. I also find that the target managerial incentives increase the success probability of a takeover bid and this positive effect is less pronounced for diversified target managers. Based on these results, I conclude that incentive alignment argument is dominated by liquidity argument in less diversified target firms, however, holds in diversified firms. For acquirer managers, I do not find any evidence that supports incentive alignment or diversification arguments.

WHAT DRIVES FIRMS TO DIVERSITY? By RONG GUO Committee Chair: Dr. Omesh Kini Major Department: Finance This paper examines whether corporate governance structures, serving as proxies for agency costs, can explain firms’ decision to diversify. Specifically, it has been hypothesized that firms with worse corporate governance structures are more likely to diversify. The extant literature usually compares the governance characteristics of multi-segment firms to those of single segment firms to address this issue. However, different governance characteristics may simply reflect differences in firm characteristics of diversified firms and focused firms. Furthermore, industry factors may affect both the propensity of firms to diversify and their governance characteristics. To separate out the agency costs explanation of firms’ decision to diversify, I compare the corporate governance structures of single segment firms that choose to diversify with those of a matched sample of single segment firms in the same industry that choose to remain focused. I find that firms with a higher percentage of outsiders on the board and smaller board size are more likely to diversify. These findings are inconsistent with the agency costs explanation of why firms choose to diversify. In addition, the CEO pay-to-performance sensitivity of diversifying firms is also not significantly different from that of firms that stay focused. The corporate governance characteristics cannot explain the changes in excess value around diversification either. Although some of the governance characteristics are significantly related to the announcement effects of diversifying mergers, these relations are often inconsistent with the agency cost explanation. Taken together, my evidence indicates that diversifying firms do not systematically have worse governance structures than firms that stay focused and, therefore, higher agency costs do not appear to drive the decision to diversify.

Yee Cheng Loon’s dissertation abstract Model uncertainty exists in the mutual fund literature. Researchers employ a variety of models to estimate risk-adjusted return, suggesting a lack of consensus as to which model is correct. Model uncertainty makes it difficult to draw clear inference about mutual fund performance persistence. We explicitly account for model uncertainty by using Bayesian model averaging techniques to estimate a fund’s risk-adjusted return. Our approach produces the Bayesian model averaged (BMA) alpha, which is a weighted combination of alphas from individual models. Using BMA alphas, we find evidence of performance persistence in a large sample of US equity, bond and balanced mutual funds. Funds with high BMA alphas subsequently generate higher risk-adjusted returns than funds with low BMA alphas, and the magnitude of outperformance is economically and statistically significant. We also find that mutual fund investors respond to the information content of BMA alphas. High BMA alpha funds receive subsequent cash inflows while low BMA alpha funds experience subsequent cash outflows.

I investigate the relation between firm risk and firm transparency over the period 1992-2006 and find that the level of firm transparency and the level of firm risk are negatively related. I also find that higher CEO pay-performance sensitivity (delta) works to mitigate this inverse relationship. This result is consistent with Hermalin and Weisbach (2007) who suggest that managers reduce risk to protect their pay and performance evaluations under higher levels of firm transparency. I further find that firms in high technology industries are more likely to increase risk relative to firms in other industries when transparency is high. Finally, I develop an additional proxy for transparency based on the Standard and Poor’s Transparency and Disclosure Score. Results using this proxy are generally consistent with my findings that there is an inverse relationship between risk and transparency and that CEO pay-performance sensitivity lessens this relationship.

The present paper explores the effects player transfers have on share price for publicly traded football clubs in Europe. The study utilizes two samples: one English sample from 1997—2004, and another more contemporary European sample from 2007—2014. Preliminary analysis assesses share price links with team performance, financial variables, and two STOXX indices. Further analysis includes 12 event studies testing for abnormal returns resulting from player transfers. Of these 12 event studies, half of the transfers yield abnormal returns. Though results varied, there remains ample evidence from this paper for academics to further study the topic of player news and share prices for publicly traded football clubs.

New Zealand's public sector reforms have been hailed as a model of theoretical consistency and coherence. The associated financial management reforms, known internationally as new public financial management (NPFM), were world-leading although they are no longer unique. The underlying nature and intent of public sector reforms have been the subject of considerable debate internationally. Early public sector reforms openly sought privatisation, often on ideological grounds. However, in the face of gathering public opposition, public discussion of privatisation softened. NPM and NPFM have been promoted instead mainly on more pragmatic grounds such as improving public sector performance. In New Zealand, the Public Finance Act 1989 is the key legislation underpinning the financial management reforms. The Act delegates regulatory powers to the Treasury and, over time, a considerable body of secondary regulation, including accounting rules, has been developed. However, this secondary regulation, and its contribution to the success or otherwise of the public sector reforms, has not been examined in detail to date. In 1999, New Zealand s Controller and Auditor-General suggested that the financial management system erodes government departments resources and that somehow this resource erosion escapes parliamentary scrutiny. The Treasury, on the other hand, defended the foundations of the financial management system as solid, arguing that retention of the existing framework would allow further and faster progress towards improved performance and value-for-money than would be achieved by a new set of reforms. This debate prompts questions whether and, if so, how and why a financial management system, ostensibly implemented to improve the performance and accountability of the public sector, could be linked to such effects, and whether parliamentary scrutiny is indeed avoided. This thesis examines the secondary regulation and explains the development of the financial management system with the intention of answering those questions. The analysis undertaken in this thesis suggests that New Zealand's public sector financial management system fabricates the conditions under which privatisation initiatives might be accepted for pragmatic reasons. The erosion of departments financial resources is an essential mechanism in that fabrication process. As this system has developed, the time available for parliamentary scrutiny has reduced and the Controller and Auditor-General s controller function has been eroded, while the control and discretion exercised within the Treasury has increased. Arguably, these developments have helped to conceal the system s privatising intent. The thesis identifies features of the financial management system used to rationalise the financial resource-eroding processes. It also notes that if New Zealand's financial management system is no longer unique, then other NPFM systems may contain a similar combination of features.

I find the low volatility anomaly is present in all but the smallest of stocks. Portfolios can be formed on either total or idiosyncratic volatility to take advantage of this anomaly, but I show measures of idiosyncratic volatility are key. Standard risk-adjusted returns suggest that there is no low volatility anomaly from 1996 through 2011, but I find this result arises from model misspecification. Caution must be taken when analyzing high volatility stocks because their returns have a nonlinear relationship with momentum during market bubbles. I then find that mutual funds with low return volatility in the prior year outperform those with high return volatility by about 5.4% during the next year. After controlling for heterogeneity in fund characteristics, I show that a one standard deviation decrease in fund volatility in the prior year predicts an increase in alpha of about 2.5% in the following year. My evidence suggests that this difference in performance is not due to manager skill but is instead caused by the low volatility anomaly. I find no difference in performance or skill between low and high volatility mutual funds after accounting for the returns on low and high volatility stocks.