Ronald Giammarino

In this thesis, I study the asset pricing aspect of institutional investors and their ability to provide financial services to households. The thesis consists of three essays. In the first essay, I theoretically investigate how institutional investors with different holding horizons allocate capital and the related asset pricing implications. I propose a model in which some institutions have shorter holding horizons, defined as short-term institutions, than other institutions, i.e. long-term institutions. The optimal portfolio of short-term institutions tilts towards speculative stocks that experience more volatile future demand shocks, which create transient trading opportunities. The current demand from short-term institutions increases the prices of these speculative stocks and reduces their buy-and-hold returns, making them less desirable for long-term investors. The model provides predictions relating a stock's short-term institutional ownership, trading opportunity, and expected return.In the second essay, I test the predictions of the first essay. Empirically, short-term institutions, identified as high-turnover institutions, invest more in stocks with higher CAPM beta, higher idiosyncratic volatility, and lower buy-and-hold abnormal returns. The difference in the buy-and-hold abnormal return between stocks with least and most short-term institutional investors is more than 3% per year. Stocks with more short-term institutional investors also provide more trading opportunities, allowing short-term institutions to make more trading profits. Their trading profits increase with market sentiment. This essay demonstrates that the desirability of investing in speculative stocks depends on an institution's holding horizon.The third essay examines the well-established negative relation between expense ratios and future net-of-fees performance of actively managed equity mutual funds. I show that this relation is an artifact of the failure to adjust a fund's performance for its exposures to the profitability and investment factors. High-fee funds exhibit a strong preference for stocks with low operating profitability and high investment rates, characteristics associated with low expected returns. After controlling for exposures to profitability and investment factors, I find that high-fee funds significantly outperform low-fee funds before fees and perform equally well net of fees. These results support the theoretical prediction that skilled managers extract rents by charging high fees.

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An important focus of the financial literature has been the role of legal institutions in the development of financial markets, and its impact on the long-run economic growth and welfare.This work contributes to this literature by studying the impact of three legal institutions on asset prices, the decisions of firms and households, and the sustainability of regulated markets. The first legal institution considered in this thesis is the personal bankruptcy code. Specifically, I study how the protection that this institution provides to households impacts the loan market equilibrium. The second legal institution is the total allowable catch (TAC) in the fishing industry. This institution limits the annual catch of a renewable resource (fish) in a geographic area. I research how to define the exploitation limits incorporating financial incentives to the problem, and if this institution can help to achieve a financially and ecologically sustainable harvest. Finally, the third legal institution studied in this thesis is the tax code, specifically, how the treatment of corporate losses, and the possibility of carrying them forward in time, ties in with the future equity risk and return of a firm.All institutions are described in detail and discussed empirically and theoretically. The results of my research show that they have a significant impact on the decisions of market agents and in the determination of asset prices. From the study of the personal bankruptcy code, I find that higher household protection at bankruptcy relates to a lower quantity of loans to households, and lower delinquency rates, indicating that riskier households are being priced out of the market, affecting their welfare. With respect to the TAC regulation, I find that for a representative fishery it is optimal to preserve a significant part of the resource for future harvesting, even in the presence of multiple sources of uncertainty. Finally, after evaluating the effect of Tax Loss Carry Forwards on the firms’ risk and returns, I find that its magnitude is highly significant in positively forecasting standard equity risk measures, that they significantly predict equity returns, even when accounting for standard measures of risk.

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This dissertation examines the effects of nominal and agency frictions in three different environments. The first essay builds a New Keynesian model to analyze the effects of changes in the maturity structure of nominal government debt on the real economy and inflation. The model includes nominal frictions, a time-varying maturity structure of nominal debt and allows for variations in the interaction between the monetary and the fiscal authorities. This essay shows that when the slope of the term structure of interest rates is nonzero in a fiscally-led policy regime the irrelevance of open market operations, changing the duration of government liabilities, is violated. Furthermore, maturity restructuring policies, conditional on the slope of the term structure of interest rates, can smooth macroeconomic fluctuations and offer substantial welfare benefits.The second essay studies how agency frictions between spouses affect their consumption, asset allocation and marital decisions. To examine this nexus, a life cycle model with limited commitment between spouses is built. The model is able to endogenously produce time-varying risk aversion at the household-level through changes in the relative income between spouses that alter their relative bargaining power. Consistent with the data, changes in relative income are associated with significant shifts in the portfolios of households. Also, the model can rationalize the empirical patterns relating marital transitions to changes in portfolio allocations. Furthermore, the risk-sharing benefits of marriage in the model imply a positive link between wealth and risky asset holdings across households, which is observed in the data. The final essay presents a dynamic agency model to study the effects of firms' exposure to aggregate risk on CEOs' contracts. The model features a risk-averse representative shareholder, risk-averse managers that exert unobservable effort and firms that are heterogeneously exposed to aggregate risk. In the model, managers are incentivized by a mix of short- and long-term compensation, and the threat of being fired. The contract differs between firms with different exposure to aggregate risk. The model can explain salient features in the data; namely, the negative relation between aggregate risk and long-term compensation and the procyclicality of aggregate turnover.

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In this thesis, I present three essays on the interaction of two dynamic aspects of mergers and acquisitions. First, merger activity follows waves within industries over time. Second, acquirers' announcement returns are on average small and decline within merger waves. In the first essay, I develop a model of merger waves to study the interplay between merger timing and market anticipation of deal announcements. I show that the pattern of small and declining announcement returns for acquirers in merger waves is consistent with the notion that the market learns over time and is thus able to better anticipate deal announcements. This explanation contrasts with existing theories which attribute the declining pattern in announcement returns to a decline in deal quality. The model delivers several predictions about time-series and cross-section aspects of acquirers' stock returns during merger wave episodes. In the second essay, I test a set of the model's predictions. As a testing laboratory, I use four industries that underwent merger deregulations in the 1990s. Consistent with existing theories, high quality deals tend to be announced early in a merger wave. However, I show that this pattern in deal quality does not explain the declining pattern in acquirers' announcement effects. Consistent with the model's predictions, I find that what matters for this pattern is the unexpected portion of deal timing. I also find evidence of contagion effects on acquirers' peers that is consistent with the information channel in the model. In the third essay, I study the drivers of merger waves by examining the allocation of equity proceeds raised at times of high merger activity. My results indicate that firms do not systematically increase debt repayment or equity payout with equity proceeds raised in high merger years. This pattern does not conform with the view that managers believe the stock is overvalued at the time of the equity issue. Instead, the observed pattern of proceeds allocation is consistent with the existence of time-varying adverse selection and investment lags. The evidence supports the idea that these frictions are important elements behind the dynamics of merger and acquisition activity.

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