Three essays in financial economics
Author(s)Westerfield, Mark W., 1977-
3 essays in financial economics
Massachusetts Institute of Technology. Dept. of Economics.
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(cont.) left on the table" due to underpricing in the IPO allocation is not capital the firm could have raised; instead, it is the empirical regularity associated with obtaining a high quality aftermarket, high equity valuation, and higher proceeds to the issuer. We examine the principal-agent problem in a simple continuous time framework when potential agents have heterogeneous priors. We find that the principal prefers agents with priors very different from his own. The principal will create a contract that includes side-bets to exploit gains from trade created by heterogeneous priors despite the distortionary effect on effort choice. In a semi-dynamic labor market, the principal can optimally choose to churn his employees to prevent them from learning about project profitability, even when agents' skills are increasing with job tenure. We develop several empirical predictions, and relate our model to the labor market in the financial industry.Milton Friedman argued that irrational traders will consistently lose money, won't survive and, therefore, cannot influence long run equilibrium asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long-run survival and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long-run limit. We show, in contrast to a partial equilibrium analysis, these general equilibrium considerations matter for the irrational traders' long-run survival. In sum, we explicitly show that price impact can persist whether or not the irrational traders survive. Market Composition and Equity Market Formation: I present a model of agents with heterogeneous beliefs who must choose whether to participate in an asset market. Investor composition affects asset prices, so the participation choice creates an externality: agents premise their entry decisions and asset valuations on the participation decisions of other agents. Investment banks can use their pricing discretion to change agents' participation decisions in IPOs. When combined with the effect of investor composition on price, this implies that allocation procedures with pricing discretion will dominate open auctions as a means to market securities. In a model with noise and rational traders, I show that noise trader participation will lower the expected value of a stock in the aftermarket, so firms will desire to exclude them from their IPOs. The "money
Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2004.Includes bibliographical references.
DepartmentMassachusetts Institute of Technology. Dept. of Economics.
Massachusetts Institute of Technology