ESSAYS ON FINANCIAL ECONOMICS

Rui Luo

This dissertation contains three essays on financial economics. The first essay explores whether managerial inconsistent time preference leads to investment and financial distortions. Time-inconsistent CEOs are impatient – they want to experience rewards sooner and delay costs later. As a result, they repeatedly procrastinate some good investments and regularly preproperate borrowing and dividend payments, leading to underinvestment, over-borrowing and excessive dividend payments relative to the first-best. I first test this prediction via reduced-form regressions. I construct a proxy for time inconsistency based on managers’ time preference revealed in their personal portfolio decisions. I find that firms with time-inconsistent managers significantly invest less, hold more debt and pay more dividends. I then formulate a dynamic investment model in which the value-maximizing manager has inconsistent time preference. Simulation results again confirm my argument: managers cut investments, hold more debt and make more dividend payments if they exhibit self-control problems. The second essay exploits proprietary records of site visits in China and investigates how corporate site visits affect information asymmetry and whether this impact is influenced by the disclosure regulation. Starting from 2009, firms listed on Shenzhen Stock Exchange were mandated to disclose site visit information while firms listed on Shanghai Stock Exchange were not required to do so. Using the adverse selection component of bid-ask spread and dispersion in analyst forecasts as proxies for information asymmetry, this paper finds that overall corporate site visits reduce information asymmetry. However, the reduction of information asymmetry is not significantly different between firms that are mandated to disclose and those that are not. The third essay provides a dynamic minimum-variance hedge for firms in incomplete markets. By accounting for price transmission between the input and output prices, the model enables firms to minimize both input and output price fluctuations through a single tradable futures contract even in incomplete markets. The model conditions on the direction of price transmission between inputs and outputs, and on the availability of futures contracts. Using the problem of a hypothetical jet fuel producer as motivation, it is found that the two-sided model leads to a more effective hedge (more volatility reduction).

ESSAYS ON FINANCIAL ECONOMICS

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