Three essays on financial economics

Abstract

<p>The main subjective of this dissertation is to analyze three issues of current interest in financial economics. Chapter 2 shows that the presence of the initial short position will give traders an incentive to manipulate by buying less or selling more. When the initial short position is not revealed, this distortion will mislead the firm through the performance of the stock in the financial market. In this circumstance, the firm may mistakenly reject some good projects due to the information asymmetry. After the revealing of the initial short position, the information asymmetry could be eliminated, and thus improve the financial market's efficiency potentially. Chapter 3 studies how strategic risk among investors can help explain both underpricing and underreaction in initial public offerings (IPOs) by using theoretical and simulation tools. If the IPO raises more capital for the firm, the post-IPO value of a firm will be higher. Hence an IPO subscriber faces strategic risk: the value of subscribing depends on the aggregate subscription rate. As this risk is resolved immediately after the IPO, the IPO itself is underpriced. Moreover, since individual investors have limited wealth, a higher offer price raises the risk of undersubscription. Investors respond by demanding a larger discount: the offer price appears to underreact to public news. Chapter 4 develops a theoretical model supported by empirical evidence examining the relation between brokerage choice and market strength. Our model shows that although internal transactions have the potential side benefits of higher commission and lower search costs to an agent, in a strong housing market, most brokerage firms still prefer external transactions because of the greater demand for housing. However, when the market weakens, external demand for housing decreases, and brokerage firms become more willing to engage in internal transactions. This occurs at the expense of lowering the selling price, which speaks to a principal-agent incentive misalignment problem.</p>