This study examines the reactions of market makers and investors to large dividend increases to identify the motives for dividend increases. Uniquely, this study simultaneously tests the signaling and agency abatement motivations as explanations of the impact of dividend increases on stock prices and bid-ask spreads. The agency abatement hypothesis argues that increased dividends constrict management's future behavior, abating the agency problem with shareholders. The signaling hypothesis asserts that dividend increases signal that managers expect higher or more stable cash flows in the future. Mean stock price responses to dividend increase announcements during 1995 are examined over both short ( _1, 0) and long ( _1, 504) windows. Changes in bid-ask spreads are examined over a short ( _1, 0) window and an intermediate (81 day) period. This study partitions dividend increases into a sample motivated by agency abatement and a sample motivated by cash flow signaling. Further, this study examines the agency abatement and cash flow signaling explanations of relative bid-ask spread responses to announcements of dividend increases. Estimated generalized least squares models of market reactions to sampled events support the agency abatement hypothesis over the cash flow signaling hypothesis as a motive for large dividend increases as measured …

The objective of this study is to answer the following research question: How large is a diversified portfolio? Although previous work is abundant, very little progress has been made in answering this question since the seminal work of Evans and Archer (1968). This study proposes two approaches to address the research question. The first approach is to measure the rate of risk reduction as diversification increases. For the first approach, I identify two kinds of risks: (1) risk that portfolio returns vary across time (Evans and Archer (1968), and Campbell et al. (2001)); and (2) risk that returns vary across portfolios of the same size (Elton and Gruber (1977), and O'Neil (1997)). I show that the times series risk reaches an asymptote as portfolio size increases. Cross sectional risk, on the other hand, does not appears to reach an asymptote as portfolio size increases. The second approach consists of comparing portfolios' performance to a benchmark portfolio that is assumed to be diversified (Statman (1987)). I develop a performance index. The performance index is calculated, for any given test portfolio, as the ratio of the Sharpe-like measure of the test portfolio to the Sharpe-like measure of the benchmark portfolio that is …

Baker and Wurgler (2002) define a new theory of capital structure. In this theory capital structure evolves as the cumulative outcome of past attempts to time the equity market. Baker and Wurgler extend market timing theory to long-term capital structure, but their results do not clearly distinguish between the two versions of market timing: perceived mispricing and adverse selection. The main purpose of this dissertation is to empirically identify the relative importance of these two explanations. First, I retest Baker and Wurgler's theory by using insider trading as an alternative to market-to-book ratio to measure equity market timing. I also formally test the adverse selection model of the equity market timing: first by using post-issuance performance, and then by using three measures of adverse selection. The first two measures use estimates of adverse information costs based on the bid and ask prices, and the third measure is based on the close-to-offer returns. Based on received theory, a dynamic adverse selection model implies that higher adverse information costs lead to higher leverage. On the other hand, a naïve adverse selection model implies that negative inside information leads to lower leverage. The results are consistent with the equity market timing theory of …

When a stock is added into the S&P 500 Index, it is automatically "cross-listed" in the index derivative markets (i.e., S&P 500 Index futures and Index options). I examined the effects of such cross-listing on the trading volume and return volatility of the underlying component stocks. Traditional finance theory asserts that futures and "cash" markets are connected by arbitrage mechanism that brings both markets to equilibrium. When arbitrage opportunities arise, arbitrageurs buy (sell) the index portfolio and take short (long) positions in the corresponding index derivative contracts until prices return to theoretical levels. Such mechanical arbitrage trading tends to create large order flows that could be difficult for the market to absorb, resulting in price changes. Utilizing a list of S&P 500 index composition changes occurring over the period September 1976 to December 2005, I investigated the market-adjusted volume turnover ratios and return variances of the stocks being added to and deleted from the S&P 500, surrounding the effective day of index membership changes. My primary finding is that, after the introduction of the S&P 500 index futures and options contracts, stocks added to the S&P 500 experience significant increase in both trading volume and return volatility. However, deleted stocks …

This study attempts to resolve two important issues. First, it investigates the diversification benefit of crude oil for equities. Second, it examines whether or not crude oil derivatives transactions by oil and gas producers can change shareholders' wealth. With these two major goals in mind, I study the risk and return profile of crude oil, the value effect of crude oil derivatives transactions, and the systematic risk exposure effect of crude oil derivatives transactions. In contrast with previous studies, this study applies the Goldman Sachs Commodity Index (GSCI) methodology to measure the risk and return profile of crude oil. The results show that crude oil is negatively correlated with stocks so adding crude oil into a portfolio with equities can provide significant diversification benefits for the portfolio. Given the diversification benefit of crude oil mixed with equities, this study then examines the value effect of crude oil derivatives transactions by oil and gas producers. Differing from traditional corporate risk management literature, this study examines corporate derivatives transactions from the shareholders' portfolio perspective. The results show that crude oil derivatives transactions by oil and gas producers do impact value. If oil and gas producing companies stop shorting crude oil derivatives contracts, …

This study is an empirical examination of a new theory that links dividends to institutional ownership in a framework of both information signaling and agency costs. Under this theory put forth by Allen, Bernardo and Welch in 2000, dividends are paid out to attract tax-favored institutional investors, thereby signaling good firm quality and/or more efficient monitoring. This is based on the premise that institutions are considered sophisticated investors with superior ability and stronger incentive to be informed about the firm quality compared to retail investors. On the agency level, institutional investors display monitoring capabilities, and can detect and correct managerial pitfalls, thus their presence serves as an assurance that the firm will remain well run. The study provides a comprehensive analysis of the implications of the theory by testing various aspects of the relationship between dividends and institutional holdings. Unlike the prevalent literature on this topic, I give specific attention to the different types of institutional investors and their incentives to invest in dividend paying stocks. Moreover, I analyze the signaling and the agency effects on the market reaction to dividend initiations within the framework proposed by the theory. Finally, I test the smoothing effect institutions have on dividends by …

Most initial public offerings (IPOs) feature share lockup agreements, which prohibit insiders from selling their shares for a specified period of time following the IPO. However, some IPO firms agree to have a much longer lockup period than other IPO firms, and some are willing to lockup a much larger proportion of shares. Thus, the primary research question for this study is: "What are the reasons for the divergence of the lockup agreements?" The two main hypotheses that this dissertation investigates are the signaling hypothesis based on information asymmetry, and the commitment hypothesis based on agency theory. This study uses methods that have not been applied by previous studies in the literature relating to IPO lockups. First, I directly use IPO firms operating performance as a proxy for firm quality. The results show neither a negative nor a strong positive relationship between lockup length and firm operating performance. Thus, based on operating performance, the evidence does not support the agency hypothesis while showing weak support for the signaling hypothesis. I then examine the long-run returns for IPO firms with different lockup lengths. I find that firms with short lockup lengths have much better long-run returns than firms with long lockup …

Using 1,473 going private transactions completed between 1985 and 2007, I assess whether the increase in going private transactions that occurred after the passage of the Sarbanes-Oxley Act of 2002 (SOX) was driven by SOX, or whether this phenomenon continues an ongoing historical trend. To examine this issue, I initially used structural break tests and intervention analysis. From the initial techniques, I find support that the passage of SOX increased going private transactions for these categories. Secondarily, I use Granger causality tests and impulse response functions to examine the link between going private transactions and the public stock market. When I categorize going private transactions according to the type of acquirer, transaction size, and target industry, I find bi-directional Granger causality relationships between smaller-sized going private transactions and the S&P 500 Index (or Tobin's Q). I also find several unidirectional Granger causality relationships for some categories of going private transactions, based on the type of acquirer or the target industry, to the S&P 500 Index (or to Tobin's Q). The impulse response of going private transactions (or the public stock market) to a shock in the public stock market (or going private transactions) is not immediate, but is delayed two …

Poster presentation for the 2009 University Scholars Day at the University of North Texas discussing research on whether it pays for companies to go green.

Poster presentation for the 2010 University Scholars Day at the University of North Texas discussing research on the changing role of risk management in a global capital market.

Poster presentation for the 2010 University Scholars Day at the University of North Texas discussing research on international policies on pollution.

This paper discusses research into the development, application, and further growth of real options analysis.

Poster for the 2011 University Scholars Day at the University of North Texas discussing research on mercury pollution and an analysis of public policies regulating production.

Presentation for the 2008 University Scholars Day at the University of North Texas discussing research on for-profit and nonprofit microfinance and how the poor are affected.

This paper discusses research on the microfinance industry, for-profit versus nonprofit models, and the efficacy of microfinance in alleviating poverty.

Presentation for the 2010 University Scholars Day at the University of North Texas discussing research on the development, application, and further growth of real options analysis.

Several studies have observed that stocks tend to drop by an amount that is less than the dividend on the ex-dividend day, the so-called ex-dividend day anomaly. However, there still remains a lack of consensus for a single explanation of this anomaly. Different from other studies, this dissertation attempts to answer the primary research question: How can investors make trading profits from the ex-dividend day anomaly and how much can they earn? With this goal, I examine the economic motivations of equity investors through four main hypotheses identified in the anomaly’s literature: the tax differential hypothesis, the short-term trading hypothesis, the tick size hypothesis, and the leverage hypothesis. While the U.S. ex-dividend anomaly is well studied, I examine a long data window (1975 to 2010) of Thailand data. The unique structure of the Thai stock market allows me to assess all four main hypotheses proposed in the literature simultaneously. Although I extract the sample data from two data sources, I demonstrate that the combined data are consistently sampled. I further construct three trading strategies: “daily return,” “lag one daily return,” and “weekly return” to alleviate the potential effect of irregular data observation. I find that the ex-dividend day anomaly exists …

Midwest Independent Transmission System Operator, Inc. (MISO) is a non-profit regional transmission organization (RTO) that oversees electricity production and transmission across thirteen states and one Canadian province. MISO also operates an electronic exchange for buying and selling electricity for each of its five regional hubs. MISO oversees two types of markets. The forward market, which is referred to as the day-ahead (DA) market, allows market participants to place demand bids and supply offers on electricity to be delivered at a specified hour the following day. The equilibrium price, known as the locational marginal price (LMP), is determined by MISO after receiving sale offers and purchase bids from market participants. MISO also coordinates a spot market, which is known as the real-time (RT) market. Traders in the real-time market must submit bids and offers by thirty minutes prior to the hour for which the trade will be executed. After receiving purchase and sale offers for a given hour in the real time market, MISO then determines the LMP for that particular hour. The existence of the DA and RT markets allows producers and retailers to hedge against the large fluctuations that are common in electricity prices. Hedge ratios on the MISO …

This paper was awarded a Nicholas and Anna Ricco Ethics Award for 2013. In this paper, the author discusses corporate responsibility through a case study of TOMS shoes and their stance in the business world as a for-profit company with social responsibility at its core.

In this paper I use an equity duration framework to develop and empirically test the hypothesis that returns on growth stock portfolios react more strongly to Federal Funds target rate change announcements, as compared to value stock portfolios. When I decompose the Federal Funds rate change, I find that portfolio returns are only sensitive to rate shocks, as opposed to the predictable component of rate change. Since growth stocks are expected to have higher duration than value stocks, I further explore the well documented polarity between value and growth stocks, by examining the interest rate sensitivities of portfolios that diverge along four fundamental-to-prices ratios: dividend yield, book-to-market value, earnings-to-price and cashflows-to-price. In each case, I find that price reactions are more pronounced for portfolios with high growth characteristics. I also document that portfolio returns react asymmetrically to positive and negative target rate surprises, and that this reaction is conditional on the state of business cycles - periods of economic expansions and recessions. To improve the robustness of my results, several statistical applications have been applied. First, I include Newey-west estimators to examine significant levels of regression estimates. Second, I check if there is any contemporaneous correlation across target rate shocks …

This dissertation is structured as three essays on various aspects of equity option introduction. Topics addressed include the relative predictability of introduction, the relationship between predictability of introduction and the price effect associated with introduction, and a comparison of the price response of optioned versus nonoptioned stocks to changes in dividends. Essay 1 involves use of firm-specific variables in a LOGIT model to allow assignment of a probability of equity option introduction. Two samples were developed: one of firms that were optioned, the other of firms which met the objective standards but were not optioned. A LOGIT model is used to assign a probability of optioning to each firm. A holdout sample is used to test the out-of-sample predictive power of the model. Firms were correctly classified as optioned or nonoptioned in about 85 percent of cases. Various researchers have detected abnormal positive returns associated with stock option introduction. In an efficient market context, this would indicate that option introduction is "good" news to financial markets. If optioning is predictable, stocks with a higher probability of optioning would be expected to show less price response when options are introduced. In Essay 2, the relationship between the probability of optioning and …

Recent studies of the valuation of real estate have concentrated on the use of hedonic pricing techniques in which the implicit prices of the component characteristics of an asset are inferred from the observed sale price using regression analysis. All of these studies include as explanatory variables one or more locational factors, such as distance to the central business district, as proxies for the effect that location has on the utility of land. In this research, the explicit consideration of the location of real estate in terms of the geographic or Cartesian coordinates (spatial attributes) of observed sales is shown to be a potential substitute for such proxies, either wholly or in part. Such use of spatial attributes could improve the usefulness of the hedonic methodology while at the same time significantly reducing cost and eliminating sources of error.

Bankruptcy is a costly event. Holders of publicly traded securities can rely on security prices to reflect their risk. Other stakeholders have no such mechanism. Hence, methods for accurately forecasting bankruptcy would be valuable to them. A large body of literature has arisen on bankruptcy forecasting with statistical classification since Beaver (1967) and Altman (1968). Reported total error rates typically are 10%-20%, suggesting that these models reveal information which otherwise is unavailable and has value after financial data is released. This conflicts with evidence on market efficiency which indicates that securities markets adjust rapidly and actually anticipate announcements of financial data. Efforts to resolve this conflict with event study methodology have run afoul of market model specification difficulties. A different approach is taken here. Most extant criticism of research design in this literature concerns inferential techniques but not sampling design. This paper attempts to resolve major sampling design issues. The most important conclusion concerns the usual choice of the individual firm as the sampling unit. While this choice is logically inconsistent with how a forecaster observes financial data over time, no evidence of bias could be found. In this paper, prediction performance is evaluated in terms of expected loss. Most …

This dissertation is structured as three essays on real estate investment trusts and financial markets. It addresses the financial performance and systematic risk of different REIT types, the information content of REIT bankruptcies, and the effect of recent tax law changes on the REIT industry.