Three essays in empirical finance

Risik, Elizabeth A.

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https://hdl.handle.net/2142/16777 Copy

Description

Title

Three essays in empirical finance

Author(s)

Risik, Elizabeth A.

Issue Date

2010-08-20T17:57:35Z

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

Almeida, Heitor

Doctoral Committee Chair(s)

Almeida, Heitor

Committee Member(s)

• Lins, David A.
• Weisbenner, Scott
• Wang, Jay

Department of Study

Finance

Discipline

Finance

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Date of Ingest

2010-08-20T17:57:35Z

Keyword(s)

• Mergers
• Options
• Mutual Funds
• Corporate Finance
• Behavioral Finance
• Signaling

Abstract

In the first chapter of this dissertation, entitled “Signaling and Value Creation in Mergers,” I analyze the acquirers in both withdrawn and completed merger deals to disentangle the effects of signaling from those of target valuation and expected synergies. Completed stock (cash) acquirers earn 14 percent (10 percent) more than their withdrawn counterparts over the six months following initial announcement. However, if an announced stock merger later falls through, the acquirer suffers a negative revaluation due to the initial signal released, and the negative return is not reversed upon deal withdrawal. These results suggest that the initial negative stock price reaction in stock mergers is due to a signaling effect, but that the mergers themselves are positive NPV investments for the acquirers’ shareholders. Analysis of the acquirers’ financial positions also supports the signaling interpretation. Within stock deals, acquirers with more cash and less leverage—those that are least likely to need equity financing—have the lowest announcement returns. In the second chapter of this dissertation, entitled “Option Market Overreaction to Stock Price Changes,” my coauthors and I examine the relationship between implied volatility of individual options on S&P 100 stocks and the ex-post realized volatility of the stocks following sharp movements in the underlying stock prices. We find that the implied volatility is significantly higher than the realized volatility. Furthermore, we are able to construct profitable trading strategies based on this finding. We believe that we are the first to document a successful trading strategy involving writing individual stock options, even while taking transaction costs into account. In the third chapter of this dissertation, entitled “Actively Managed Mutual Fund Returns Versus the S&P 500 Index,” I examine the performance of funds that are “closet indexers”. I develop three variables that measure how similar a fund is to the Vanguard 500 Index, and I regress fund returns on these measures, along with control variables. The majority of my results find that active managers add value over the S&P 500 index, but the results can vary depending on benchmarking method, variable used to represent closet indexing, and how standard errors are calculated. The variance in results suggests that previous research be read with caution, as methods used to calculate standard errors may produce misleading results. My main result, based on characteristic benchmarked returns, is robust to how the standard errors are calculated.

Graduation Semester

2010-08

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http://hdl.handle.net/2142/16777

Copyright and License Information

Copyright 2010 Elizabeth Ann Risik

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