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Title:Three essays in financial economics
Author(s):Kim, Yongjun
Director of Research:Johnson, Timothy C.
Doctoral Committee Chair(s):Johnson, Timothy C.
Doctoral Committee Member(s):Pearson, Neil; Almeida, Heitor; Choi, Jaewon
Department / Program:Finance
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Asset pricing
Fixed income
Labor economics
Abstract:The first essay, Wage Differentials, Firm Investment, and Stock Returns, investigates the effects of labor costs on firms’ capital investments and stock returns. I estimate wage premia across U.S. industries and show that the negative investment-return relation implied by q-theory is steeper for high wage firms than for low wage firms. Using wage premia as a proxy for labor adjustment costs, an extended investment-based model predicts the interaction effect because capital-labor complementarity implies that labor market friction also governs the investment decision. The inflexibility induced by wages offers new insights into asset prices and corporate investments. In the second essay, Anomalies in the Joint Cross Section of Equity and Corporate Bond Returns, we show that many cross-sectional anomalies in equity returns do not appear in the corporate bond returns of the same firms. These puzzling findings are in fact consistent with contingent claim pricing. Corporate bonds typically have low credit risk and their hedge ratios, or the sensitivity of debt to equity, are quite small. As a result, much less than 10% of equity return premia translate to corresponding bond return premia. Exceptions are asset growth, investment, and momentum, in which bond return premia are too large compared with hedge ratios, suggesting that the bond return premia are driven by channels that function independently of changes in underlying firm values. We also document the investor sentiment effect in corporate bonds by showing that expected returns on bond portfolios hedged against equity risk increase with sentiment and are concentrated on the short side of long-short strategies. The third essay, Labor Skills and Technology Change, highlights the importance of labor characteristics for firm behavior and asset prices. The productivity of skilled labor is subjected to aggregate technology innovation, implying that a firm’s usage of skilled labor determines its exposure to the shock. I find that profits are more sensitive to technology shocks in firms depend more on skilled worker. Combined with the positive price of technology risk, high skill firms have higher expected returns than low skill firms.
Issue Date:2017-07-12
Rights Information:Copyright 2017 Yongjun Kim
Date Available in IDEALS:2017-09-29
Date Deposited:2017-08

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