Three Essays on Corporate Finance and Institutional Investors
Type of DegreePhD Dissertation
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In chapter 1, we investigate the effects of activist investors on firms’ mergers and acquisitions. Using a comprehensive data set, we find that 138 out of 1,301 acquirers have activist investors comprising both hedge fund activists and entrepreneurial activists (venture capital funds, private equity funds and individual investors). For completed deals, acquirers with activist investors experience significantly higher announcement cumulative abnormal returns compared to acquirers without activist investors. In addition, acquirers with activist investors are more likely to withdraw from value-destroying transactions, defined as those with negative acquisition announcement returns. Further, the market reacts more favorably when these value-destroying transactions are withdrawn to acquirers with activists than to those without activists. Our results highlight the role of activist investors in aligning managers’ and shareholders’ interests in acquisition decisions. In chapter 2, using political corruption as a measure of misconduct culture, we find that institutional investors are more local biased and their trading on local stocks can better predict future local stock returns, particularly for high information asymmetry stocks, in high corruption areas. More importantly, local institutional investors’ trading is also positively related to local stocks’ future earnings surprises in high corruption areas, which suggests that local institutions in high corruption areas possess private information that is useful in predicting future returns. These results together suggest that the inappropriate sharing of information is a potential channel from which institutional investors gain informational advantages. In chapter 3, I study the role of CEO work experience on firm tax policies. Empirical results show that CEOs who used to work for low-tax firms pursue more tax avoidance than other CEOs and the results are robust after controlling for other manager characteristics, firm characteristics and various fixed effects. In addition, while other CEO common characteristics such as age, tenure, gender, and educational background are unable to explain the variation in firms’ tax policies, the CEO low-tax experience is significantly negatively correlated with firm’s tax avoidance. My findings highlight the roles of manager characteristics, especially the roles of work experience, on firms’ tax planning strategies.