Department of Finance

Florida Atlantic University Departmental Dashboard Indicators. Department program reviews for College of Business, Florida Atlantic University.

Florida Atlantic University Departmental Dashboard Indicators. Department program reviews for College of Business, Florida Atlantic University.

Florida Atlantic University Departmental Dashboard Indicators. Department program reviews for College of Business, Florida Atlantic University.

Increasing evidence suggests the personal traits of chief executive officers (CEOs) can influence corporate policies. We examine how one dimension, past professional experiences, can affect corporate payout policy. Exploiting exogenous CEO turnovers and future employment, we hypothesize that CEOs experiencing a distress event in their past career alter the corporate payout policy at their subsequent firm of employment. We discover that CEOs having experienced prior professional career distress are less likely to pay dividends and use repurchases and pay out lower levels for each type of payout. Additionally, when CEOs with distress do have a payout policy greater than zero dollars, there exists a preference toward the use of repurchases in the payout policy, adding to the literature of substitution and differences between the two forms of payout. We find that dividend smoothing is reduced by CEOs that have past professional distress.

In this work I investigate how executive social connections and executive gender diversity dually affect firm Corporate Social Responsibility (CSR), a set of firm policies implemented to benefit the social, economic, and environmental welfare of all stakeholders, and how the changes in CSR driven by executive social connections and executive gender diversity in turn affect a range of corporate policies. This research adds to the social networks, gender, and CSR literature within finance in multiple ways. First, while much past work examines the impact on corporate policy of executive gender or executive social connections in isolation, no major work to date examines the impact of gender dependent executive social connections on corporate policy. Second, this work definitively ties the dual effects of executive gender diversity and social connections to firm CSR. The dual impact of social connections and gender diversity on CSR is shown to affect major corporate policies. In all, this work provides evidence that CSR helps drive important firm polices, including M&A and executive compensation policy, and that CSR is impacted by both a firm’s executive gender diversity and social network connections.

In Essay 1, I use cross-country differences in investors’ traits — trust, patience,
overconfidence, and risk tolerance — to test the underreaction, overreaction, and
uncertain information theories of stock returns. I find that investors’ reactions to large
daily stock price shocks vary between lower and higher levels of these traits. Specifically,
investors with lower levels of trust and more patience underreact more (or overreact less)
to price shocks, which aligns with the predictions of the underreaction hypothesis.
Investors with higher levels of overconfidence overreact more to positive price shocks
and overreact less to negative price shocks. While this finding does not conform exactly
to the predictions of the overreaction hypothesis, it is consistent with more refined
theories of how overconfidence affects asset prices. Investors less tolerant of risk
overreact less to positive price shocks. I also find that differences in institutional
characteristics affect over/underreaction. Specifically, there is less overreaction in
countries with stronger investor protections and less insider trading. Additionally, the ability to sell short is associated with more overreaction to negative shocks and less
overreaction to positive shocks.
In Essay 2, I investigate whether publicly available information (PAI) affects
over/underreaction according to predictions of several theoretical models, and then I test
if differences in investors’ traits modifies the association between publicly available
information and returns. After identifying and correcting for a methodological issue in
some prior research, I show that in a pooled international sample of stocks, investors
overreact to price shocks not accompanied by information, and also overreact (or react
efficiently in some models) to information-based price shocks. I find that the effect of
PAI on returns is not the same in each country, which motivates my tests on how this
variability relates to differences in investor traits. My results show that investors with
higher trust tend to overreact less to shocks accompanied by PAI, while investors less
tolerant of risk underreact to positive price shocks. Additionally, investors with higher
overconfidence and self-attribution bias overreact more to positive price shocks, but less
to negative price shocks, in accordance with behavioral theories.

Information asymmetry literature has developed models that explain the relation
between uninformed traders and informed traders. In general, these models have shown
that first, information asymmetry is a driving force for investor buying and selling
behavior. Second, the trades of informed investors reveal some of the information they
possess suggesting that the trades of informed investors are informative to market
makers. Third, when information about a stock enters the market, the characteristics of
the firm can change, e.g., a better information environment reduces the cost of capital
(Admati, 1985; Easley and O‟Hara, 2004; Wang, 1993).
In this study, I apply information asymmetry theory to explore the trading
behavior of active equity mutual fund managers and their role as facilitators of
information. In the first essay, I study the information environment of firms mutual funds
choose to add to their holdings and how it changes after the inclusion. I identify all new
additions to the mutual fund holdings universe from 2002 to 2015 and compare them to the available universe of firms not yet owned by mutual funds. I find that active
equity mutual fund managers behave as informed investors and prefer to buy stocks with
more opaque information environments i.e., firms with larger spreads, lower trading
volume, smaller firms with more growth opportunities, and firms that tend to use more
accruals. Fund managers also show a preference for firms that have less analyst
following, those in which analysts are less likely to agree on their EPS estimates, and
firms in which analysts are more likely to err in their predictions. In other words, mutual
fund managers prefer firms that are more likely to be mispriced. Once the funds include
the firms, I document a strong improvement in their information environment. Firms
attract more analyst coverage, reduce its use of accruals, produce more guidance, increase
their market cap, and show increased turnover.
The second essay focuses on the herding behavior of mutual funds. The study is
the first to document the herding of mutual fund managers after creation of toehold
positions by portfolio managers. I use a hand-collected dataset consisting of all toehold
acquisitions reported to the SEC from 1995 to 2015 to document a strong herding
reaction of active equity mutual funds after toehold announcements. This herding
reaction is several times stronger than other mutual fund herding events reported by
previous literature. I also document that the strength of the herding reaction varies
depending on the identity of the filer or the characteristics of the firm acquired. The
herding reaction is stronger for toehold announcements of firms with a smaller market
capitalization, better growth opportunities, and those that are more illiquid. I also find
that the herding reaction is weaker after the filings of hedge fund managers. My results
support the informational herding cascade hypothesis.

In Essay 1, I investigate the impact of corporate life cycle dynamics on the
observed negative association between asset growth and stock returns in the crosssection.
I find that the asset growth effect on average exists across some life cycle stages
measured using cohorts. However, controlling for certain variables associated with the
theoretical explanations, I find there is no relation between asset growth and returns. I
argue this evidence is consistent with an agency-based explanation of the asset growth
effect. Furthermore, a decomposition of the drivers of the effect shows that different
components of assets (i.e. working capital and financing) drive asset growth effect at
different life cycle stages. From a decomposition analyses, results show that in the
youngest firms (cohort 1), asset growth effect is mostly driven by both operating liability
and stock financing on one side (financing) and noncash current assets, PPE, and growth
in other assets (for working capital) while cohort 3’s drivers appear to be stock issuances, together with noncash current assets, which I conclude offer further support for
agency issues.
In Essay 2, I examine how firms’ life cycle affect insider trading behavior, profits
surrounding trades, price informativeness, and financing constraints. I argue that if firms’
policies and characteristics change over time as shown in lifecycle literature, then from
firm characteristics that motivate insider-trading behavior, one should observe some
differences across varying life cycle stages measured using age cohorts. I find that
insiders are net sellers at all life cycle stages of a firm. Furthermore, insiders tend to trade
more in younger firms than in older firms even though they have fewer numbers of
insiders trading. Trading characteristics are generally statistically significant across
cohorts. Overall, insiders appear to predict the correct direction for positive wealth
generation when trading. Specifically, at all lifecycle stages, they appear to sell before
negative CARs, and buy during periods associated with negative CARs that lead to
positive CARs days after insider transactions. The findings on price informativeness
suggest that in general insider purchases enhance price informativeness for firms at
different lifecycle stages, however, this finding holds only for cohort 4 (oldest firms) in
the case of insider sales. The implication of this finding is that regulation should be more
lax towards purchases as compared to sales for firms, except for sales in firms that are
older. Lastly, insider trades are linked with positive investment-cash flow sensitivities for
both insider purchases and insider sales, which generally increase monotonically across
cohorts. This finding is robust to using GMM approach.

The study examines the effects of executives’ media connection on corporate
policies. Extant literature in finance, economics and journalism provide inconclusive
evidence in determining whether media works as watchdog to the financial market or
whether media facilitates bias through manipulation of corporate news events. I introduce
two competing hypotheses that may explain the research question. Information Efficiency
Hypothesis predicts that media connected firms mitigate information asymmetry among
its investors, enjoy better governance, and are less likely to manipulate information on
corporate policy choices. Manipulation Hypothesis, in contrary, suggests that firms may
strategically utilize media connections to alter the information flow that may paint a
tainted picture of the firm’s prospects, thereby facilitating greater misvaluation and
devising of opportunistic corporate finance policies. I test these hypotheses on a set of
investment policies (mergers outcomes and innovative efficiency) and financing policies
(seasoned equity offerings and share repurchases). In the first essay, I find that media connection increases merger announcement
return, reduces takeover premium, increases the likelihood of deal completion, although
post-merger long term performance exhibit inconclusive results. Also, media connection
reduces innovative efficiency and change in innovative efficiency attributable to media
connections is harmful for the firm in the long run. Overall, results are consistent with the
manipulation hypothesis to some extent though further investigation is required before
disregarding the information efficiency effect.
In the second essay, results show that media connection increases the likelihood
of an SEO event, reduces the announcement period CAR. However, analysis of post SEO
long term operating and stock performance show mixed results. For repurchasing firms,
media connection increases announcement returns, increases the likelihood of repurchase
and the amount repurchased. Media connection also increases the likelihood that
repurchase is preferred over dividends as a mode of payout. Post repurchase long term
operating and stock performance, however, provide inconsistent results. In general,
results are consistent with the manipulation hypothesis though information efficiency
hypothesis could not be ruled out entirely.

This dissertation investigates the association of operating leverage with stock returns, the value premium, and the profitability premium. Results in the first essay support the hypothesis that operating leverage is related to stock returns and the value premium across the sampled countries. Results are robust to cross-country differences, typical controls, multiple definitions of operating and financial leverage, and while controlling for the endogeneity of operating and financial leverage. This suggests that the rational explanation for the presence of the value premium lies in the underlying risk exposure of fixed asset risk of operating leverage which is expressed through the value premium. Results further support the hypothesis of strengthening labor protection increasing operating leverage. In turn, increased labor protection marginally negatively associated with the value premium, suggesting that labor protection reduces the value premium through financial leverage. However, because operating and financial leverage are oppositely affected by employment protection, the joint effect of this association may be cumulatively washed out in estimating value premium with employment protection legislation.
Results in the second essay further support the hypothesis that operating leverage is related to stock returns and additionally support the hypothesis of operating leverage being associated to the profitability premium. The profit premium tends to be insignificant when generated within operating leverage portfolios, and the profit premium only tends to be significantly positive in the higher operating leverage portfolios. Furthermore, once operating leverage and profitability are orthogonalized from one another, the estimated coefficient of profitability is reduced by a magnitude of roughly 10. These results provide evidence in support of the profit premium being based on the riskiness of the firm through operating leverage, and therefore the profit premium is a rationally priced risk factor in stock returns.