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The Effect of the Sarbanes-Oxley Act of 2002 on Corporate Governance
Year of Dissertation:
The Sarbanes-Oxley Act of 2002 (SOX) introduced strict governance rules for public companies in the US to prevent diversion of resources by corporate insiders. Another governance mechanism that serves to align the interests of managers and directors of the firm with outside shareholders is ownership structure as discussed in Chapter 1. The equity structure of dual-class firms is characterized by multiple classes of shares with differential voting rights, which allows insiders to hold disproportionate dividend and voting rights. Dual-class status may serve as a protection from value-reducing takeovers and help the realization of growth options. At the same time, since managerial cash-flow rights have an incentive alignment effect, while voting control reduces the discipline of the market for corporate control, dual-class firms may protect large private benefits of insiders. Chapter 2 evaluates the effect of SOX on incentive alignment between managers and shareholders. The value-increasing effect of managerial cash-flow rights is expected to be smaller in magnitude after SOX. Similarly, the negative effect of voting control should be less pronounced after SOX. Using dual-class firms, these effects can be separately estimated in a panel data model. Results indicate a smaller positive effect of cash-flow rights which is evidence that the governance provisions of SOX improve managerial incentive alignment. Chapter 3 analyses differences in returns on inferior and superior shares of dual-class firms, which are expected to reflect reduced value of voting control after SOX. The market models in the event study methodology account for non-synchronous trading due to thin market in the superior shares. There is no evidence of improved performance of inferior shares vs. superior shares in the market's expectations around key SOX dates. Insiders would value control less if SOX limits private benefits of control and may want to divest their holdings by recapitalizing into single-class. At the same time, if dual-class status is beneficial to outside shareholders, the new rules would reduce the cost in terms of diversion of resources. Chapter 4 empirically tests the effect of SOX on recapitalization decisions of dual-class firms into single-class by formulating a survival model. Results indicate that the propensity of firms to recapitalize into single class is significantly higher after the passage of the Act.
ESSAYS ON SPATIAL ECONOMETRICS: ESTIMATION METHODS AND APPLICATIONS
Year of Dissertation:
This dissertation consists of four essays on the estimation methods and applications of spatial econometrics models. In the first essay, we consider a spatial econometric model containing spatial lags in the dependent variable and the disturbance terms with an unknown form of heteroskedasticity in the innovations. We first prove that the maximum likelihood estimator (MLE) is generally inconsistent when heteroskedasticity is not taken into account in the estimation. We show that the necessary condition for consistency of the MLE depends on the specification of the spatial weight matrices. Then, we extend the robust generalized method of moment (GMM) estimation approach in Lin and Lee (2010) for the spatial models allowing for a spatial lag not only in the dependent variable but also in the disturbance term. We show the consistency of the robust GMM estimator and determine its asymptotic distribution. Finally, through a comprehensive Monte Carlo simulation, we compare the finite sample properties of the robust GMM estimator with other estimators proposed in the literature. In the second essay, the finite sample properties of heteroskedasticity robust estimators suggested for the spatial autoregressive models are compared through simulation studies. Most of the estimators suggested for the estimation of spatial autoregressive models are inconsistent in the presence of an unknown form of heteroskedasticy. The estimators formulated from the GMM and the Bayesian Markov Chain Monte Carlo (MCMC) frameworks can be robust to an unknown form of heterokedasticity. In this essay, the finite sample properties of the robust GMM estimators and the Bayesian estimators based on MCMC approach are compared for the spatial autoregressive models. To this end, a comprehensive Monte Carlo simulation is designed for the spatial models containing a spatial lag in the dependent variable and/or disturbance term. In the second part of the study, two empirical applications are provided to show how heteroskedasticity robust estimators are performing in applied research. In the third essay, we investigate the properties of spatial autoregressive models that have a spatial moving average process in the disturbance term. The spatial moving average process introduces a different interaction structure among observations. In the first part of this essay, we describe the transmission and the effect of shocks under a spatial moving average process. In the second part, we investigate the necessary condition for consistency of the maximum likelihood estimator (MLE) of spatial models with a spatial moving average process in the disturbance term. We show that the MLE of spatial autoregressive and spatial moving average parameters is generally inconsistent when heteroskedasticity is not considered in the estimation. We also show that the MLE of parameters of exogenous variables is inconsistent and determine its asymptotic bias. We provide simulation results to evaluate the performance of the MLE. The simulation results indicate that the MLE imposes a substantial amount of bias on both autoregressive and moving average parameters. In the fourth essay, we analyze the effect of foreign direct investment (FDI) on economic activity through a spatially augmented Solow growth model that takes technological interdependence into account. The technological interdependence manifests itself through spatial externalities which allow technology level of a country to depend on technology levels of its neighbors. Based on this modified growth model, we derive regression specifications and study the impact of FDI on economic growth. The spatial autocorrelation, often cited in the empirical growth literature, is properly accounted for through these new specifications. Estimations are carried out with the tools from spatial econometrics. Our findings indicate that FDI inflows have a significant positive effect on the growth rate of host countries.
Essays on Economic Policy: Income Inequality and Health Insurance
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This dissertation contains economic analyses of two critical social issues facing the United States at the dawn of the 21st century: income inequality and the affordability of health insurance. The chapter on income inequality uses the Solow Model of economic growth to model the evolution of inequality over time. In steady state, differences in household saving rates generate differences in household capital income. Households that save more accumulate more capital and have higher steady-state income. Tax policy affects the distribution of income through its influence on household saving rates. Increasing the tax rate on labor income causes a greater percentage decrease in the steady-state saving rates of relatively low savers, thus increasing pre-tax income inequality. Conversely, increasing the tax rate on capital income reduces pre-tax income inequality because it causes a greater percentage decrease in the steady-state saving rates of relatively high savers. Empirical tests of the model using data from the March Current Population Survey and NBER's TAXSIM model suggest that higher taxes on wage income are associated with higher levels of income inequality. A high degree of correlation among the average marginal tax rates prevents us from drawing inferences about the effect that taxation of capital income has on inequality. The chapter on health insurance examines states' efforts to make health insurance more accessible and affordable to small employers by restricting insurers' ability to set premium rates on the basis of health status and other factors which predict a group's future medical needs. The chapter presents evidence that rating restrictions reduce health insurance coverage rates and increase market concentration in the insurance industry. From the perspective of a public policymaker however, such reforms may still be desirable if they increase the ability of less healthy individuals to obtain and afford health insurance coverage.
The trading Efficiency on Options Market: Essays on stock options market
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THE TRADING EFFICIENCY ON OPTIONS MARKET: ESSAYS ON STOCK OPTIONS MARKET By Yan Feng Advisor: Professor Christos Giannikos F. Black (1975) in his seminal paper "Fact and Fantasy in the use of options" mentioned a number of fantasies that widely spread in the options markets. Since Black's (1975) paper was published, there were significant changes and innovations in the options markets. The purpose of this paper is to address some of the pricing and trading aspects in the options markets. The first paper studies the impact of option liquidity on the level of implied volatility function for equity and stock index options. Option liquidity is measured by percentage bid-ask spread, option trading volume and open interest. The study finds a significant negative effect of percentage bid-ask spread on implied volatility level, as well as positive effect of trading volume and open interest on implied volatility level. After adjusting for the underlying asset's total risk, the option percentage spread still has significant negative effect on the level of option excessive volatility. Among several firm specific variables, beta coefficient and systematic risk proportion have significant effects on the slope of excessive implied volatility function. The Fama-MacBeth regressions are used to test the hypotheses for eight moneyness categories separately. This paper explains the implied volatility function from the viewpoint of option market efficiency, and proves that the illiquidity premium documented in stock and bond market is also significant in stock options market. In The second paper, risk-neutral Skewness derived from stock options market is used to test the information role of options price in predicting stock returns after earnings announcements. The result shows that risk-neutral skewness before earnings announcement day contains information about stock returns during earnings announcement period. Less negative options risk-neutral skewness and the positive change of skewness predict higher abnormal return after earnings announcement. In addition, it is the individual risk-neural skewness and idiosyncratic risk that play more important role in predicting the abnormal return.
Essays on Globalization, Skills and Development
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This dissertation examines how globalization, defined as increase in trade or Foreign Direct Investment (FDI), influences development in terms of economic growth and labor market effects. It also studies the role of human capital in affecting economic development both directly and interacting with globalization variables. The dissertation consists of four chapters: one macroeconomic study that revisits the impacts of globalization and education on economic growth (Chapter 1) and three micro-level case studies on Vietnam's labor market. One micro paper explores the impacts of FDI on wages (Chapter 2), another investigates the impacts of FDI on internal migration (Chapter 3), and the final study explores the effects of export liberalization on Vietnam's skill premium (Chapter 4). The dissertation's findings broadly support the view that globalization can be an "engine of growth", but its mechanisms are complex. One insight from the macro study is a positive impact of trade and FDI on capital formation on average in developing countries. The micro studies for the case of Vietnam suggest that the labor market is another channel through which globalization may bring growth where it spurs employment, raises wages and brings about interregional labor migration. The macro study also reveals a strong and positive direct impact of education on economic growth, which in turn is consistent with the results of the micro studies. The dissertation provides evidence that globalization and skill variables interact in ways that vary depending on different channels and specific episodes of trade liberalization. For instance, whereas foreign firms generally pay higher foreign wage premiums for better educated workers, they also play a role in raising wages of less skilled women relative to alternative jobs in the informal wage sector. In the aftermath of the U.S.-Vietnam Bilateral Trade Agreement, Vietnam's provinces which are more exposed to the increase in export opportunities experienced a larger wage growth for unskilled workers and a decline of the skill premium relative to the other provinces. However, as Vietnam's economy-wide skill premium increased during the period studied, the latter effect appeared to have mitigated but did not outweigh the other effects which raised the skill premium.
ESTIMATION OF AN EMPIRICAL FAVAR MODEL AND DSGE MODEL FOR EVALUATING EFFECTS OF GOVERNMENT SPENDING IN JAPAN
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This paper studies the effects of government spending on the economy through estimation of an empirical Factor Augmented Vector Autoregression (FAVAR) model and a theoretical DSGE model. We first conducted FAVAR using data for 107 time series from Japan, and found that an increase in government investment and consumption leads to an increase in private consumption and real wages. We then constructed a New Keynesian (NK) general equilibrium model with real and nominal rigidities, including Edgeworth complementarity/substitutability between private and government consumption and productive public capital. The model extends the Bouakez and Rebei (2007) model in three dimensions: constructing an NK model, including intertemporal investment adjustment cost and variable capital utilization as real rigidities, and introducing public capital stocks as an externality to the production function of intermediate goods firms. Our model succeeds in explaining private consumption and real wages increase in response to government expenditure shocks. We estimate key parameters of the model using Bayesian inference and show that private and government consumption are Edgeworth complements and marginal productivity of public capital is productive in Japan.
A R&D Based Real Business Cycle Model
Ka Wai Terence Fung
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The New Keynesian Real Business Cycle model with staggered price adjustment is augmented with a R&D producing sector. Two sources of economic shocks are separately considered, namely random paricipation (perturbances to value of alternative investment opportunities in another sector) and financial intermediation (shocks to the cost of raising capital in the financial intermediation market). We find that, when comparing to the baseline model, both random participation and financial intermediation models can explain pro-cyclical R&D spending. Additionally the investment oversensitivity problem is corrected. However, only the financial intermediation model is consistent with the observed finding that the volatility of R&D is larger than that of investment and output.
FISCAL DECENTRALIZATION: DOES THE SOURCE OF REVENUE MATTER?
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Abstract Fiscal Decentralization: does the Source of Revenue Matter? Evidence from Rural India Pallavi Jain Govil Adviser: Professor Timothy J. Goodspeed Is the pattern of expenditures of village governments related to their sources of revenue? Do village governments use own-source revenues more efficiently than transfer grants to provide public services to their constituents? This paper begins with the premise that local governments are more participative, more acceptable, and more accountable and hence, deliver better. I use a policy change introduced in 1997 in province of Madhya Pradesh in India, whereby the power to collect royalty and lease rents on minor mineral mines and fishing tanks was transferred to village governments, as a natural experiment and examine whether expenditure patterns of villages that received such resources differ from those that did not. I find that village governments choose to spend their fiscal resources differently depending on where the money comes from, even if these resources are completely `untied' and could be spent entirely at the discretion of the village governments. I also compare the social outcomes in villages that gained such additional resources to those that didn't, and thus remained more dependent on transfer grants from the state and central government for their development needs. Using village level data, I find evidence to support the hypothesis that fiscal decentralization through assignment of taxation powers is more effective in achieving desired outcomes as compared to a transfer of an equal amount of resources by way of grants.
ESSAYS ON THE IMPACTS OF QUANTITATIVE EASING ON FINANCIAL MARKETS
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Due to the severity of the financial crisis of 2008, the Federal Reserve had attempted a variety of unconventional monetary policy to support the U.S. financial markets at the verge of collapse. The most well-known of the Fed's unconventional monetary policy is quantitative easing, in which it purchased a large amount of government securities from the markets in order to lower longer term interest rates and mortgage rates. The several rounds of quantitative easing had different impacts, intended as well as unintended, on U.S. financial markets and foreign markets. The purpose of this paper is to fully explore the effects, especially the unintended ones, the different rounds of quantitative easing have on financial markets. The first chapter is a comprehensive study of the unconventional monetary policy taken by the Federal Reserve since the financial crisis, specifically on the purchases of different assets by the Fed to change medium and long-term rates. Included in this chapter are the three rounds of quantitative easing, and the two rounds of Operation Twist. A study as such is needed in order to examine if the Fed's purchases of these various long-term assets had any effect on the financial markets in the longer term perspective since the first announcement of such purchase in November 2008. While there exists a variety of literature on the effects of quantitative easing on Treasuries and mortgage backed securities, there is no single study comprising of all the large scale asset purchases by the Fed, covering their effects on all major financial assets. This first chapter is an attempt to fill this void in current literature on quantitative easing. The second chapter utilizes an event-study approach to analyze the impact of announcements regarding the third round of quantitative easing on emerging market economies. Using a daily panel data of fifteen emerging economies, the period examined is from August 1, 2012 to May 30, 2014, which is one month before QE3 announcement one month after the fourth announcement of tapering by the Fed. Results show that markets have a larger response to tapering news than easing news, particularly from official Fed press releases. Additionally, these emerging market economies also react to conventional monetary policy of federal funds rate.
Essays in Labor Economics and Econometrics: Applications of The Copula Method
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This dissertation mainly consists of three essays of original research. One element that these essays have in common is a copula method that generates joint distributions in flexible ways. Therefore, Chapter 1 describes the copula method as an introduction. Two essays, Chapter 2 and Chapter 3, are empirical research in the field of labor economics, in which the copula method is applied to construct econometrics models. One essay, Chapter 4, uses copulas in order to develop a new econometric technique. Chapter 2 empirically investigates the difference in wage structures of permanent workers and temporary workers in the Netherlands. The findings are that starting wages of permanent workers are slightly lower than starting wages of temporary workers and that wages of permanent workers grow more rapidly than wages of temporary workers. These findings derive from an econometric model that is built on a distributional assumption using the copula method that relaxes the traditional model. Chapter 3 empirically investigates the structure of adjustment costs of factors of production with a plant-level panel dataset from the Indonesian manufacturing sector. The copula method is applied in order to estimate the adjustment costs of labor and capital simultaneously and to differentiate the distribution assumption from a more standard approach used in previous studies. The estimates provide evidence of nonconvex and asymmetric adjustment costs of both labor and capital. Chapter 4 proposes a new approach to estimating sample selection models that combines Generalized Tukey Lambda (GTL) distributions with the copula method. The GTL distribution is a versatile univariate distribution that permits a wide rangeof skewness and thick- or thin-tailed behavior in the data that it represents. The versatility arising from inserting GTL marginal distributions into copula-constructed bivariate distributions reduces the dependence of estimated parameters on distributional assumptions in applied research. A thorough Monte Carlo study illustrates that our proposed estimator performs well under various data generating processes. Six applications illustrate the value of the proposed GTL-copula estimator.