Three essays in financial economics

Nguyen, Quoc

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https://hdl.handle.net/2142/46881 Copy

Description

Title

Three essays in financial economics

Author(s)

Nguyen, Quoc

Issue Date

2014-01-16T18:25:06Z

Director of Research (if dissertation) or Advisor (if thesis)

• Deuskar, Prachi
• Weisbenner, Scott

Doctoral Committee Chair(s)

• Deuskar, Prachi
• Weisbenner, Scott

Committee Member(s)

• Almeida, Heitor
• Pearson, Neil D.

Department of Study

Finance

Discipline

Finance

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Empirical Asset Pricing
• Corporate Finance

Abstract

The first essay asks the question: Do investors pay attention to foreign market conditions when they evaluate multinational corporations? Using geographic segment disclosures by U.S. multinational companies, I find that stock prices do not promptly incorporate information regarding changes in foreign market conditions, which in turn generates return predictability in the cross-section of firms with foreign operations. A simple trading strategy that exploits geographic information yields risk adjusted return of 135 basis points per month, or 16.2% per year. The predictability cannot be explained by firm's own momentum, industry momentum, post-earnings-announcement drift, being a conglomerate, or exposure to emerging market risk. Consistent with the investor inattention hypothesis, I further document that firms with less analysts, firms with lower institutional holdings, small and medium-sized firms, and firms with more complex foreign sales compositions, exhibit stronger return predictability. This paper is the first to document the predictable link between foreign country-level index returns and U.S. firm-level stock returns, and adds to the growing literature concerning the role of investor inattention and firm complexity in price formation. The second essay finds that in contrast to the perception of a common 2/20 fee structure, there are considerable cross-sectional and time series variations in hedge fund fees using a large panel data set. Fund family characteristics and prior performance play an important role in fee determination. New fund families are likely to charge at- or above-median fees. Initial fees of funds introduced by an existing family are positively related to the prior performance of the family as well as of the investment strategy they follow. Furthermore, management fees are dynamically adjusted in response to past fund performance. Funds that increase management fee more aggressively experience a bigger drop in subsequent money inflows, and are more likely to maintain their good performance. This suggests that fee increases, which typically apply only to new investors, may benefit existing investors by mitigating diseconomies of scale. The third essay measures the causal impact of public sector's spending on private sector's investment. Based on the fact that federal funds allocated to the local governments are largely dependent on the local population level, we use population count revisions in decennial census years as exogenous shocks to the cross-sectional allocation of federal funds. We document strong evidence that exogenous increases in the federal spending reduce both firms' capital and R&D investment. This contraction in investment is accompanied by a decrease in employment growth, a decrease in sales growth, as well as an increase in dividend payouts and repurchases. The effect of government spending is more pronounced among firms that are smaller-sized, more geographically concentrated, and located in regions with higher employment rate. Furthermore, we find direct evidence that an exogenous increase in government hiring and wage spending reduces subsequent corporate employment growth. Taken all together, the evidence we present is consistent with the crowding out effect of government spending, not through the traditional interest rate or tax rate channel, but through the labor channel.

Graduation Semester

2013-12

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Copyright and License Information

Copyright 2013 Quoc Hoai Nguyen

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