Essays in Valuation, Financial Regulation, and Corporate Governance PDF Download

Author: Charles Chang-Yi Wang
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Languages : en
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This dissertation consists of three distinct essays. "Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital" studies the properties of measurement errors for a class of expected return proxies, and addresses inference issues when proxies of expected returns are dependent variables in regressions. I develop a novel diagnostic procedure to estimate the associations between measurement errors of expected returns proxies and firm characteristics, when measurement errors are AR(1). Application to GLS, a popular implementation of the implied cost of capital ("ICC"), yields the first direct empirical evidence that ICC measurement errors i) are persistent, ii) can be associated with ... firms' risk or growth characteristics, and therefore iii) can lead to spurious inferences in regressions. I devise a novel methodology to account for the influence of ICCs measurement errors in regression settings, and show that its application i) can explain some puzzling associations between GLS and ... firm characteristics and ii) can improve upon GLS, by forming new ICCs that better sort realized returns. Together, the innovations of this paper allow researchers to better understand ICC measurement errors and provide a robust empirical strategy for future research. "Can Implicit Regulation Change Financial Market Behavior? Evidence from Spitzer's Attack on Market Timers" explores a natural experiment setup from the 2003-2004 U.S. mutual fund scandals to evaluate the effectiveness of implicit regulation and the role of a strong monitor on ... financial markets behavior. On average, buy-and-hold investors lost 218 basis points annually from 1998 to 2002 to market timers' exploitation of stale-priced mutual funds. Buy-and hold investors suffered further economic losses from higher cash holdings, portfolio turnover, fund fees, and lower performance that resulted from market timing fund churn. As a consequence of the heightened public scrutiny, increased transparency, and bolstered monitoring capabilities by the SEC, mutual funds faced a much intensified threat of regulation by the end of 2004, leading to the voluntary fair value pricing of international holdings by most U.S. mutual funds. I ... find strong evidence that these fair value pricing methods have significantly reduced the market timing motive as well as fund churn in international mutual funds in the post-2004 period. These results suggest that self-regulation in the ... financial markets can be effective, but in the presence of a strong and credible regulatory threat. "Staggered Boards and the Wealth of Shareholders: Evidence from Two Natural Experiments" addresses an important question in corporate governance: does the presence of a staggered board cause lower ... firm value? While staggered boards have been documented to be negatively correlated with ... firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely reflecting the tendency of low-value firms to have staggered boards. In this paper, we use two natural experiments to shed light on the causality question. In particular, we focus on two recent court rulings, separated by several weeks, that affected in opposite directions the antitakeover force of staggered boards: (i) a ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company's annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws. We ... find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of affected companies -- namely, companies with a staggered board and an annual meeting in later parts of the calendar year -- and that the Supreme Court ruling produced a reduction in the affected companies' value. The identified effects were most pronounced for firms for which control contests are especially relevant due to relative underperformance, small ... firm size, high asset pledgibility, or high takeover intensity in their industry. Our findings have implications for the long-standing debate on staggered boards. The ... findings are consistent with the market's viewing staggered boards as bringing about a reduction in firm value. Our ... findings are thus consistent with leading institutional investors' policies in favor of board de-staggering, and with the view that the ongoing process of board de-staggering in public ... firms can be expected to enhance shareholder value.