Browsing by Author "Gervais, Simon"

In Chapter 1, I document a negative (positive) relationship between changes in large (small) blockholders' ownership and abnormal returns. The evidence in this paper suggests that an increase in the relatively large blockholders' ownership raises the consumption of private benefits while an increase in the relatively small blockholders' ownership constrains large blockholders from expropriating minority shareholders. Moreover, I find an inversely U-shaped relationship between changes in the largest blockholders' ownership and firm value. As large blockholders' ownership and control increase, the negative effect of firm value driven by expropriating minority shareholders starts to exceed the incentive benefits of monitoring by the largest blockholder. I also show that the negative relationship between changes in institutional investors' control and abnormal returns declines as analysts' following increases.

In Chapter 2, I study the role of trading as a governance mechanism. I hypothesize that governance through trading plays a significant monitoring role in practice and that engaging in "voice" and "exit" can be substitutes. I show that abnormal turnover following earnings announcements is significantly higher for firms with large institutional blockholders than for those with small individual

shareholders. For firms with majority institutional ownership, I demonstrate that abnormal trading is higher for firms with multiple blockholders than for those with a single large blockholder and that abnormal trading increases with the number of institutional investors and declines with the percent of stocks owned by the

largest institutional investor. Moreover, this excess trading is driven by mutual fund investors, which are non-interventionist and thus are more likely to engage in "exit" than "voice". I also show that for firms with large institutional blockholders, abnormal trading following public announcements increases with liquidity.

This essay is composed of two papers. In the first paper, I build a theoretical model for the double-sided squeeze in the commodity futures market. The model shows that the manipulator can profit from combining standard short squeeze techniques with control of the physical flows in the warehouses. In the second paper, I build a model for commodity middlemen with aggregate demand shocks. The model shows that having more middlemen in the market can increase the spot price volatility and decrease producers' surplus, all contrary to common wisdom.

This dissertation comprises two chapters studying how information transmitted in the economy and the financial markets becomes compressed in communications and its consequences. In chapter one, the compression is due to limited communication bandwidth, and in chapter two, it is due to limited attention on the receiver’s end.

Chapter one discusses how information intermediaries selectively present evidence to serve financial decision-makers. Faced with a space limit for their communication reports, the information intermediaries present information selectively. I solve the model for the optimal messages in the intermediaries' communication with the decision-makers and investigate the relationship between the apparent messages and the inferred economic fundamentals. The two main findings are: (i) the model matches many stylized facts about content biases such as prior or extreme biases; (ii) I derive an analytical relationship between the messages and the inferred fundamentals in the asymptotics. This relationship can be conveniently used to interpret observed content biases and quantitatively analyze the effects of the context on the interpretation of contents. The theory also shows that content biases may improve rather than decrease welfare. The model relates to empirical content analysis using frequency-based proxies and can be used to analyze contextual effects on contents.

In chapter two, I develop and analyze a theoretical model that shows how investors allocate their limited attention resources to monitor a wide selection of target firms. An investor with limited attention demands information about the types of her portfolio firms before investing. The firms strategically supply good news and withhold bad news. The investor may press companies to reveal more information by allocating more costly attention to them. Because the benefit to attention is convex, the investor will optimally focus on a subset of firms and acquire complete information while giving up learning anything about the other firms. Firms in the scrutinized subset have low investigation costs and a high Expected Value of Perfect Information (EVPI), and they always receive an efficient amount of capital. The other firms are provided with an inefficient level of capital and suffer from extreme asymmetry in information transparency. The result rationalizes convertible debt as a socially optimal financing instrument for private firms. It can be applied to a venture capital context to analyze entrepreneurial investment relationships.

In this dissertation, I study the sources and consequences of heterogeneity in the behavior of different institutional investors in financial markets. In particular, I show that (i) institutional investors respond to the incentives generated by their organizational structures, (ii) the strategy a particular institutional investor pursues depends on their skill, and (iii) institutional investors have heterogeneous impacts on equilibrium market prices.

In the first chapter, I begin by documenting the substantial heterogeneity in portfolios across different types of investors. To explain this phenomenon, I build a model in which investors have different information processing capabilities. The model predicts that highly capable investors specialize in factor timing, hold more volatile and dispersed portfolios, and reduce average risk premia and volatility. Using novel empirical measures of investors' capabilities and information choices, I find that hedge funds are the most capable investors, while insurance companies and pension funds are the least. Variation in factor timing ability is the primary driver of these differences. Investors' portfolios exhibit properties consistent with the model's predictions. Using a demand system approach, I show that hedge funds have the greatest per-dollar impact on expected returns, shrinking expected returns in the factor zoo by nearly 40% per $1 trillion of invested capital.

In the second chapter, I examine whether hedge fund managers respond to the incentives generated by their compensation contracts. To do this, I present a model in which hedge fund managers maximize their expected compensation subject to leverage constraints. This allows me to explore the impact of hedge funds' prototypical contract structure on their dynamic risk allocations and on asset prices in general. One implication of the model is that risk taking varies as a function of a fund's distance to its high-water mark. My empirical work is consistent with the implications of the model in that hedge funds at and furthest from their high-water marks take on significantly greater levels of risk. This increased risk is accomplished in part by investing in more volatile securities. Further, as more hedge funds approach their high-water marks, aggregate hedge fund risk taking increases, the security market line flattens, and betting against beta returns increase, consistent with evidence that these funds increase investment in high beta securities. This work highlights the importance of misaligned preferences between financial intermediaries and investors in explaining asset prices.

In transactions where costly efforts from both the seller and the buyer help prevent selling to the unfit buyer, the unique optimal law that restores the first-best requires the seller to refund the buyer and pay a punitive penalty of the buyer's loss. If the social planner can infer from a loss whether efficient efforts had been exerted, the law with contingent punitive penalty always restores the first-best with a balanced actual budget. The law is harsher for one-stop than for specialized purchase, as a loss is more likely due to shirking. Higher budget surplus cost can make the social optimum more implementable. We study constrained optima if the first-best is unattainable or if a balanced budget is enforced. With costless efforts or unilateral moral hazard or no effort choices, no punitive penalty is needed to always restore the first-best with a balanced budget. Bilateral moral hazard rationalizes punitive penalty and determinacy of law yet complicates regulation. Our model applies widely to many goods and services and yields novel predictions.

I also study efficient disclosure by contingent non-disclosure. I show that if the sender is not always active and receivers do not know if the sender is active, then compound information can be efficiently conveyed only if some information is withheld contingently. Our theory has wide applications in fields like political economy, public policy, and law. It is optimal for the benevolent social planner to purge dissident yet useful information so as to convey the more welfare-relevant information to its citizens. Even the most liberal and transparent government should implement undemocratic policies for the citizens' own good. Transparency or disclosure laws can hurt citizens. We contribute to the economic theory of information transmission, and identify a new situation where the sender's interest is perfectly aligned with receivers', more information always helps receivers, yet it is optimal to contingently block some information away from receivers. Our theory has novel predictions and policy implications.