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Theses Doctoral

Essays in Financial Economics

Rocha da Mota Mertens, Lira

This dissertation studies topics in financial economics. In the first chapter, The Corporate Supply of (Quasi) Safe Assets, I examine whether the demand for safe assets affects nonfinancial corporations in the US. Investors value safety services in financial assets, such as the ability to serve as a store of value, to serve as collateral, or to meet mandatory capital and liquidity requirements. I present a model in which investors value safety services not only in traditional safe assets such as US Treasuries, but also in corporate debt. Shareholders thus maximize the value of the firm by complementing standard business operations with safe asset creation. Based on this theoretical framework, I use the CDS-bond basis to derive a measurement of the safety premium of corporate bonds. I document substantial cross sectional variation in the safety premium of corporate bonds, which allows me to test the model’s predictions. I show that a high safety premium leads toa marked increase in debt issuance by relatively safer firms. These debt proceeds have a small impact on real investment and are largely used instead for equity payouts. This mechanism can explain why, in the aftermath of the financial crisis, non-financial investment grade companies significantly increased their debt issuance and equity payout while investment remained weak.

The second chapter, The Cross-Section of Risk and Return, focuses on a common practice in the finance literature which is to create characteristic portfolios by sorting on characteristics associated with average returns. We show that the resultant portfolios are likely to capture not only the priced risk associated with the characteristic but also unpriced risk. We develop a procedure to remove this unpriced risk using covariance information estimated from past returns. We apply our methodology to the five Fama-French characteristic portfolios. The squared Sharpe ratio of the optimal combination of the resultant characteristic efficient portfolios is 2.13, compared with 1.17 for the original characteristic portfolios.

In the third chapter, Should Information be Sold Separately? Evidence from MiFID II, we examine whether selling information separately improves its production. We use a recent regulation in Europe (MiFID II) that unbundles research from transactions to investigate this question. We show that unbundling causes fewer research analysts to cover a firm. This decrease does not come from small- or mid-cap firms but is concentrated in large firms. Contrary to conventional wisdom, the reduction in the coverage quantity is accompanied by an increase in the coverage quality. Further analyses suggest that the enhancement of analyst competition could drive the results: inaccurate analysts drop out (extensive margin) and analysts who stay produce better-quality research (intensive margin). Our findings suggest that selling information separately improves information quality at the cost of reducing information quantity.

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More About This Work

Academic Units
Thesis Advisors
Santos, Tano
Ph.D., Columbia University
Published Here
May 4, 2021