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Title: Essays in financial economics
Author: Li, Lucius
Awarding Body: University of Warwick
Current Institution: University of Warwick
Date of Award: 2015
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This thesis consists of three essays in financial economics. Specifically, it focuses on financial market reactions to intangible information like employee satisfaction and tangible information like corporate earnings news. It examines the effects of factors including institutional contexts and quality of information environment on how financial markets incorporate those information. The second chapter examines the relationship between employee satisfaction and abnormal stock returns around the world, using lists of the "Best Companies to Work For" in 14 countries. We show that employee satisfaction is associated with positive abnormal returns in countries with high labor market flexibility, such as the U.S. and U.K., but not in countries with low labor market flexibility, such as Germany. These results are consistent with high employee satisfaction being a valuable tool for recruitment, retention, and motivation in flexible labor markets, where firms face fewer constraints on hiring and ring. In contrast, in regulated labor markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns. The results have implications for differential profitability of socially responsible investing (SRI) strategies around the world. In particular, they emphasize the importance of taking institutional features into account when forming such strategies. In the third chapter, we investigate the effect of ambiguity on return-earnings relation. Positive firm-level earnings news is informative about a firm’s future cash flows, thereby increases its contemporaneous stock price. However, this positive relation does not translate into aggregate level. On the contrary, positive aggregate earnings surprises lead to negative contemporaneous market returns. This puzzling finding could be explained by the diversification of firm-specific earnings surprises together with either high predictability of returns or high predictability of aggregate earnings changes. Motivated by the differential implications of the two explanations, this study constructs a theoretical model generating predictions in favour of the return-predictability explanation and provides empirical evidence supporting all the hypotheses. By interacting Knightian uncertainty with the return-earnings relation on both firm- and aggregate-level, the study shows that individual response coefficient increases with firm-level ambiguity. Firm-level ambiguity increases the aggregate earnings response coefficient. This increase is more pronounced when the degree of market-level ambiguity is high. The results conclude that the negative aggregate return-earnings relation results from the diversification effect as well as an amplifying effect of macroeconomic ambiguity on discount rate news and market- wide cash ow news. In the fourth chapter, I examine the stylized fact that market reacts much more strongly to bad news than to good news. I show that the asymmetric reaction is due to the findings that investors are more surprised by bad earnings news. This stronger surprise can be explained by the interacting effects of two key elements in investors' decision making process: ambiguity and difference of opinion. Ambiguity reduces investors' reaction to good news while increases their reaction to bad news. Difference of opinion similarly reduces reaction to good news, but it has no discernible effect on bad news response. Combining both generates a "yes" tick shape for the earnings response coefficient. This asymmetry after controlling the amount of news explains away all the negative returns generated by leaked quarterly earnings news. To rationalize the findings, I build a simple model to capture the dynamics of the earnings-return relation. Multiple-prior ambiguity and difference of opinion regarding the center of priors range are incorporated and evaluated in a maxmin framework.
Supervisor: Not available Sponsor: University of Warwick
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: HG Finance