Three Essays on Market Efficiency and Corporate Payout Policy

Abstract

Chapters 1 and 2 of this dissertation discuss a special form of regulation, soft intervention, in China. Securities Laws in China are administered by the Chinese Securities Regulatory Commission (CSRC). The CSRC has great flexibility in administering securities laws since the committee represents the will of the state. Under the state-controlled financial system, the CSRC works closely with state-controlled financial firms and suggests, but does not mandate, actions to be taken in the equity market, especially during periods of extreme market stress. These suggestions, or soft interventions, have been used to block trades associated with short positions, significantly reducing short-sales volume and futures trading volume. In Chapters 1 and 2, the impacts of these interventions on put-call parity and the cost of carry model are investigated. There is overwhelming evidence of increased deviations from put-call parity and the cost-of-carry model after soft interventions. Our results are robust after allowing for bid-ask spreads, taxes, transaction costs and Difference-in-Differences comparisons with control securities in the Hong Kong market. Chapter 3 focuses on how changes in dividend policy in 2008 as the financial crisis was unfolding influenced firm risk-adjusted returns in the following years. The sample consists of NYSE- and NASDAQ-traded firms that paid dividends in 2007. These firms are divided into four groups based on their dividend policy in 2008. Evidence shows that firms that decreased or eliminated dividends in 2008 had higher risk-adjusted returns in 2009. The higher risk-adjusted return is consistent with better corporate governance in 2007. This finding suggests that the firms that quickly reacted to the deteriorating economic conditions by cutting dividends and preserving cash were able to better weather the coming financial crisis.