Title

Three essays in financial economics

Date of Completion

January 2009

Keywords

Economics, Finance

Degree

Ph.D.

Abstract

This dissertation consists of three essays that analyze the role of information asymmetry on asset prices, the effect of asset price volatility on capital structure and the importance of cash flow news and discount rate news on firm level returns respectively. First essay empirically investigates the impact of information asymmetry among investors on asset price volatility using a number of different proxies for the prevalence of asymmetric information at firm level. It finds that these proxies for asymmetric information have a positive effect on asset price volatility in a large panel of firms listed on the NYSE, AMEX and NASDAQ stock exchanges over the period 1994-2006. ^ Second essay analyzes the role of asset price volatility on firms' capital structure decisions. This essay finds that a unit increase in asset price volatility may reduce book leverage by one percent, controlling for other determinants of capital structure suggested by previous literature. Results from a semi-parametric proportional hazard model with unobserved heterogeneity suggest that higher asset price volatility may reduce the probability of debt issuance. ^ The third essay analyzes what drives the unexpected return of firms with high information asymmetry. This essay shows that 78% of the unexpected returns of firms with high information asymmetry are driven by news about future cash flows; whereas 68% of the unexpected returns of firms with low information asymmetry are driven by news about future cash flows. ^

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