Corporate Governance and Institutional Trading

Abstract

This dissertation includes two parts. The first part examines the preventive effect of hedge fund activism against corporate policy deviations. Using stock liquidity and mutual fund fire sales as instruments, I find that when the likelihood of hedge fund activism increases, firms respond by paying shareholder more and CEOs less, holding less cash and leveraging more, and increasing investment into research and development while cutting capital expenditures. These results imply that hedge fund activism has a stronger and broader impact on corporate policy than previously documented. The second part critically examines capital flow-induced mutual fund trades as an exogenous proxy for changes in stock price. I find that liquidity-strapped mutual funds sell widely across all portfolio holdings but the extreme capital outflows could be driven by the performance of portfolio holdings in the first place.