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https://hdl.handle.net/2142/129514
Description
Title
Essays on finance
Author(s)
Lee, Jae Jin
Issue Date
2025-04-08
Director of Research (if dissertation) or Advisor (if thesis)
Zeume, Stefan
Doctoral Committee Chair(s)
Zeume, Stefan
Committee Member(s)
Almeida, Heitor
Pollet, Joshua
Choi, Jaewon
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Institutional Investor, Financial Misconduct
Abstract
My dissertation focuses on the effects of misconduct in financial institutions. The first chapter examines how political connections influence the investment decisions of public pension funds, and the next two chapters investigate how the revelation of financial advisory misconduct affects affiliated banks and the portfolio management of mutual funds.
The first chapter investigates how political connections influence public pension funds' investment decisions and performance in private equity markets. Exploiting quasi-random electoral outcomes from a sample of close U.S. state elections, I find that private equity firms donating to winning candidates who become pension board members are about ten times more likely to receive postelection investments from the pension fund than firms donating to losing candidates. Additionally, private equity funds in which public pension funds invest through political connections exhibit about five percentage points lower abnormal internal rate of return, driven partly by abnormal fund fees and home-biased investments.
The second chapter examines how the revelation of financial advisory misconduct affect the deposits of their affiliated banks. Exploiting detailed administrative data on financial advisors and the geographic dispersion of bank branches, I find that, after advisory misconduct is exposed in a county, their affiliated bank branches in that county show abnormal decreases in deposits and small business loan originations. These effects are stronger when banks are geographically closer to affiliated advisors, face serious misconduct, have more uninsured deposits, are affiliated with advisors serving fewer retail clients, or are in socially-networked counties. I establish causality through the quasi-natural experiment of the mutual fund late-trading scandal. The results indicate that there are unexplored inter-industry distrust spillovers across financial intermediaries.
Finally, the third chapter explores how business ties with portfolio firms affect the asset management strategies of mutual funds. By exploiting the revelation of mutual fund advisory misconduct as an exogenous shock to these business ties, I find that mutual fund management firms with collapsed trust tend to increase their portfolio weights in client stocks following the misconduct revelation. This shift towards client stocks effectively reduces the likelihood of business partnership termination. Additionally, I find that client stocks underperform compared to non-client stocks and exhibit indifference towards net-selling stocks held by the same mutual fund families. These findings raise concerns about fiduciary duty violations and underscore the need for vigilance in aligning investment decisions with shareholder interests.
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