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Title:Essays in economics and finance
Author(s):Rastad, Mahdi
Director of Research:Almeida, Heitor; Koenker, Roger W.; Pennacchi, George G.
Doctoral Committee Chair(s):Bernhardt, Daniel
Doctoral Committee Member(s):Almeida, Heitor; Koenker, Roger W.; Pennacchi, George G.
Department / Program:Economics
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Convertible Bonds
Capital Structure
Financing Policy
Portfolio Allocation
Public Pension Funds
Abstract:Chapter 1: A large body of the corporate finance literature is devoted to capital structure. This literature examines whether firms have a target capital structure, and whether they actively rebalance their capital structure towards a target. Conversion of a convertible bond causes a drop in leverage, which target capital structure theory suggests should be rebalanced in the future. Consistently, evidence is provided that following a realized conversion, firms rebalance their positions in less than a year. When the stock price passes the conversion price threshold for a convertible bond, the firm expects this drop in leverage to occur in the near future. Using a regression discontinuity design around the conversion price threshold, for those conversions that are decided by investors, not by the firm it is documented that a 21% increase in leverage before an actual drop in leverage. That is to say, firms do not wait for the realization of leverage shocks, but rather respond to anticipated shocks. A quantile treatment effect analysis reveals the effect to be a hump-shaped function of leverage, with a peak for firms with a conditional leverage ratio around the 70th percentile. Chapter 2: This chapter provides a theory of collusion under demand uncertainty by cartels of countries such as OPEC that do not care directly about profits, per se, but rather the utility derived by their risk averse citizens who receive those profits; and who face positive fixed operating costs. The chapter provides conditions under which it is most difficult for cartel members to collusively restrict output when demand is especially low, but it also becomes difficult to support collusion when demand is very high, showing both that cartel members must be risk averse and operating costs must be positive. Further it is established that when cartel members are more risk averse or fixed operating costs are higher, then it becomes more difficult to support collusion in bad demand states, but easier in booms. Chapter 3: The last chapter presents a model of a public pension fund's choice of portfolio risk. Optimal portfolio allocations are derived when pension fund management maximize the utility of wealth of a representative taxpayer or when pension fund management maximize their own utility of compensation. The model's implications are examined using annual data on the portfolio allocations and plan characteristics of 125 state pension funds over the 2000 to 2009 period. Consistent with agency behavior by public pension fund management, evidence is provided that funds chose greater overall asset -- liability portfolio risk following periods of relatively poor investment performance. In addition, pension plans that select a relatively high rate with which to discount their liabilities tend to choose riskier portfolios. Moreover, consistent with a desire to gamble for higher benefits, pension plans take more risk when they have greater representation by plan participants on their Boards of Trustees.
Issue Date:2012-09-18
Rights Information:Copyright 2012 Mahdi Rastad
Date Available in IDEALS:2012-09-18
Date Deposited:2012-08

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