Three essays in empirical finance

Park, Ji Min

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https://hdl.handle.net/2142/115601 Copy

Description

Title

Three essays in empirical finance

Author(s)

Park, Ji Min

Issue Date

2022-04-22

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

• Pollet, Joshua M
• Choi, Jaewon

Doctoral Committee Chair(s)

• Pollet, Joshua M
• Choi, Jaewon

Committee Member(s)

• Pearson, Neil D
• Huang, Jiekun

Department of Study

Finance

Discipline

Finance

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Institutional investors
• Asset management
• Socially responsible investing
• ESG
• Hedge funds, Short sales
• R&D
• Patent expiration
• Assets in place

Abstract

This thesis consists of three essays that examine empirical questions in finance. The first essay examines socially responsible investing (SRI) by bond mutual funds. I find that the environmental, social, and governance (ESG) scores of bond mutual funds actually decline after fund families join the Principles for Responsible Investment (PRI) network. This finding is particularly surprising because ESG scores for equity funds in these PRI fund families increase significantly as the families implement ESG-friendly investment practices when becoming PRI signatories. I also find that PRI bond funds significantly increase their holdings of bonds issued by companies in alcohol, tobacco, and gambling industries (i.e., "sin” industries) while the corresponding equity funds do not. While bond fund flows respond to past performance and funds' posted yields, they do not respond to funds' ESG scores. High ESG funds and also bonds issued by high ESG firms underperform, which helps explain the avoidance of bond funds in high ESG investments. My results suggest that complying with ESG norms incurs higher penalties in bond funds. In the second chapter, we examine the profitability of hedge fund equity short sales. We identify opening and closing trades by combining data on funds’ transactions and holdings. Short sales covered within five trading days are highly profitable, but those kept open longer are not. Some of the profitability is due to trading on information and some stems from liquidity provision in both opening and covering trades. The finding that longer-term short trades are not profitable indicates that it is difficult to achieve the returns that results in the short-selling literature suggest should be readily attainable. Short selling profitability is persistent, consistent with skill. In the third chapter, we utilize a novel identification strategy to analyze the impact of assets in place on firms' decisions for future projects. We exploit the context in the pharmaceutical industry, where the loss of market exclusivity for a branded drug can be used to separate the impact of cash flows generated by a firm's current assets in place from the characteristics of its future investment opportunities. We first show that around the exclusivity losses in our sample of large drugs, the affected firms' profitability drop significantly. The timing of this profitability decrease was predetermined many years ago, and therefore, arguably independent of current investment opportunities. Nevertheless, we find that R&D spending drops by approximately 25% over two years following the loss of exclusivity. We also find that stock repurchases and cash balances decline significantly. Our findings do not support the predictions of traditional capital budgeting, but are more consistent with the pecking order theory. These results further point to a lack of long-term lifecycle management that could mitigate the effect of predictable negative shocks to cash flows.

Graduation Semester

2022-05

Type of Resource

Thesis

Copyright and License Information

Copyright 2022 Ji Min Park

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