This thesis includes one essay on incomplete information and two essays on
the capital market implications of asymmetric information.
The acquisition of information and its dissemination to all economic units are
central activities in capital markets. Limits to information diffusion may exist when
market participants have limited processing ability or when market structure causes
information asymmetry to persist. Merton (1987) proposes a simple capital market
equilibrium model with incomplete information, in which difference in a stock’s
investor recognition affects its cost of capital. Myers and Majluf (1984) lay out the
theoretical foundation for the role of asymmetric information in corporate finance
and its capital market implications.
The first essay tests and offers support to Merton’s (1987) theory. In the U.S.
market, using the breadth of ownership among retail investors as a proxy for investor
recognition, I show that a long-short portfolio based on the annual change of
shareholder base earns a compounded annual abnormal return of 6.42% after
controlling for the Fama-French three factors. These results are more pronounced
among young, low visibility and high idiosyncratic volatility stocks. Moreover, I
present evidence that the investor recognition effect can explain approximately 20%
of the puzzling net equity issuance effect documented by Pontiff and Woodgate
(2008).
The second essay suggests a novel signaling mechanism in the framework of
asymmetric information. When a firm’s convertible debt is issued, it is not only
determined by the fundamentals of the firm such as past stock performance, but also
related to whether this performance is realized during the tenure of current CEO who
decides the issues. I define the performance that the current CEO achieves in the firm
ever since the CEO comes to the helm as CEO-specific performance. Higher CEOspecific
performance leads to (1) a higher probability of convertible issues, and (2) a
less negative abnormal stock return in response to the convertible issue
announcement, controlling for other firm characteristics. These evidences indicate
that CEO-specific performance serves as a credible information signal to influence
the adverse selection costs between the firm and outside investors in convertible
bond financing.
The third essay explores the possibility of asymmetric information in
explaining the pronounced share issue anomaly in the cross-sectional variations of
stock returns, as documented by Pontiff and Woodgate (2008). A lot of equity share
issue and repurchase actions are actively determined by the decision of corporate
stakeholders, such as employees at the stock options exercises. As these stakeholders
hold a large amount of private information about the firm, it is in their optimal
decisions to try to time the exercise of their share purchase activity, but outside
investors are likely to fail to interpret the information revealed from these actions. I
present strong evidence that a negative relation between share issues and stock
returns is affected to a greater extent when the information asymmetry problem is
more severe. / published_or_final_version / Business / Doctoral / Doctor of Philosophy
| Identifer | oai:union.ndltd.org:HKU/oai:hub.hku.hk:10722/161577 |
| Date | January 2012 |
| Creators | Guo, Chaoli, 郭朝莉 |
| Contributors | Chang, EC |
| Publisher | The University of Hong Kong (Pokfulam, Hong Kong) |
| Source Sets | Hong Kong University Theses |
| Language | English |
| Detected Language | English |
| Type | PG_Thesis |
| Source | http://hub.hku.hk/bib/B48079820 |
| Rights | The author retains all proprietary rights, (such as patent rights) and the right to use in future works., Creative Commons: Attribution 3.0 Hong Kong License |
| Relation | HKU Theses Online (HKUTO) |
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