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Three Essays in Finance

Kassa, Haimanot
http://rave.ohiolink.edu/etdc/view?acc_num=ucin1367937084

Abstract Details

2013, PhD, University of Cincinnati, Business: Business Administration.
This dissertation consists of three loosely related essays. In Essay I, I study the relationship between firm specific risk and return. In Essay II, I study the managerial and investor short-termism. And in Essay III, I study investors heterogeneous preference for skewness and its effect on the idiosyncratic volatility puzzle. Essay I: A spurious positive relation between EGARCH estimates of expected month t idiosyncratic volatility and month t stock returns arises when the month t return is included in estimation of model parameters. We illustrate via simulations that this look-ahead bias is problematic for empirically observed degrees of stock return skewness and typical monthly return time series lengths. Moreover, the empirical idiosyncratic risk-return relation becomes negligible when expected month t idiosyncratic volatility is estimated using returns only up to month t - 1. Essay II: The paper considers a model in which (1) managers allocate effort to both short and long-term projects, and (2) there is feedback between the managerial incentive contract and the number of speculators collecting information on each type of project. More weight placed on near-term price results in more speculation based on information about the short-term project, which induces further increases in the weight placed on near-term price. This feedback effect can result in short-term speculation crowding out the collection of long-term information, which in turn results in the withdrawal of incentives aimed at inducing effort in more profitable long-term projects. The paper shows that the equilibrium that obtains depends upon adjustment costs and initial conditions and is, in general, not efficient. Such outcomes are consistent with concerns about managerial and investor short-termism recently expressed by policy makers and market participants (e.g., the Aspen Institute). The paper considers the efficacy of various corporate and public policy remedies. Essay III: Consistent with models that incorporate investors heterogeneous preference for skewness, I show that (1) high skewness stocks are primarily held by investors with the strongest affinity for lottery-like payoff, (2) the negative skewness-return relation is the strongest for those stocks primarily held by agents with the strongest affinity for lottery-like payoff, (3) the idiosyncratic volatility-return relation is the strongest for those stocks held by agents with the strongest affinity for lottery-like payoff, and (4) investors heterogeneous preference for skewness help explain the idiosyncratic volatility puzzle. Taken together, the results provide evidence for the importance of investors heterogeneous preference for skewness in asset pricing and its implication on the idiosyncratic volatility puzzle.
Steve Slezak, Ph.D. (Committee Chair)
Michael Ferguson, Ph.D. (Committee Member)
Hui Guo, Ph.D. (Committee Member)
Yan Yu, Ph.D. (Committee Member)
135 p.
Business Administration
Idiosyncratic Volatility; CEO short-termism; Investor Short-termism; Heterogeneous Preference for Skewness;

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Citations

  • Kassa, H. (2013). Three Essays in Finance [Doctoral dissertation, University of Cincinnati]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=ucin1367937084

    APA Style (7th edition)

  • Kassa, Haimanot. Three Essays in Finance. 2013. University of Cincinnati, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=ucin1367937084.

    MLA Style (8th edition)

  • Kassa, Haimanot. "Three Essays in Finance." Doctoral dissertation, University of Cincinnati, 2013. http://rave.ohiolink.edu/etdc/view?acc_num=ucin1367937084

    Chicago Manual of Style (17th edition)

ucin1367937084
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This open access ETD is published by University of Cincinnati and OhioLINK.