Essays in empirical finance

Xu, Hao

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https://hdl.handle.net/2142/114003 Copy

Description

Title

Essays in empirical finance

Author(s)

Xu, Hao

Issue Date

2021-12-03

Director of Research (if dissertation) or Advisor (if thesis)

Almeida, Heitor

Doctoral Committee Chair(s)

Almeida, Heitor

Committee Member(s)

• Pennacchi, George G
• Irani, Rustom M
• Deryugina, Tatyana

Department of Study

Finance

Discipline

Finance

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• investor sentiment
• return jump
• blockholder governance
• hedge fund activism

Abstract

In the first chapter, we study the effect of investor sentiment on extreme asset price movements, i.e., return jump dynamics, and also examine the threefold relation among sentiment, news and return jump likelihood. We find that the presence of investor sentiment significantly affects the subsequent likelihood of stock return jumps. In particular, a unit increase in the presence of previous week investor sentiment predicts around 12-62 basis points decrease in the subsequent probability of positive jumps, and around 10-48 basis points increase in the subsequent probability of negative jumps. In terms of the interaction between sentiment and news, the presence of investor sentiment seems to attenuate the positive effect news coverage has in predicting subsequent return jumps, but magnify the positive effect news tone has in predicting subsequent return jumps. Given daily jumps, stronger the magnitude in investor sentiment, the smaller in return size of positive jumps but larger in size of negative jumps. When we look at the potential cross-sectional determinants of the jump sensitivity to sentiment, we find that a few firm characteristics such as size, book-to-market ratio and idiosyncratic volatility are strongly associated with sensitivity betas, albeit not in total consistency with the behavioral story. In the second chapter, we study blockholders’ governance behavior, most notably that of hedge fund activists, given changes in short-sale constraint under the 2005 Regulation SHO (Reg SHO) price tests using difference- in-differences approach. I show that when short-sale constraint is relaxed for pilot stocks in the experiment, hedge funds are about 2% more likely to engage in “voice” (proxied by 13D filings) unconditionally, 1% less likely to engage in “exit” (13G filings) unconditionally, and 10% more likely to engage in “voice” instead of “exit” conditional upon a block. This effect is particularly strong among overvalued target firms and activist hedge funds. In a similar fashion, the market responds to pilot firms’ 13G filing events during Reg SHO by a 2% significant decline in 3-day announcement return relative to control, while still regards 13Ds as equally positive governance events among pilot and controls. Lastly, short-term operating performance of pilot firms experiences a 7% significant increase following 13D events during Reg SHO relative to control while remains the same following 13G events.

Graduation Semester

2021-12

Type of Resource

Thesis

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http://hdl.handle.net/2142/114003

Copyright and License Information

Copyright 2021 Hao Xu

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