Three Essays in Investments and Corporate Finance

Abstract

Mutual funds traditionally focus their investments on the public markets. However, there has been a dramatic increase in mutual fund investment in private firms recently. The first essay examines whether mutual funds’ investments in private firms generate any information advantage in the secondary market. We find strong evidence that investing in private firms allows mutual funds to earn superior returns after private firms become public. Within six months after the lockup, mutual funds’ trading in private firms predicts stock returns and earnings surprises in the next quarter. Pre-IPO investments also enable mutual funds to make better investment decisions in the same industries where private firms are located. In addition, the information advantage is greater when mutual funds have better access to private firms or when the industries have less publicly available information.

In the second essay, we investigate Bitcoin pricing characteristics and find evidence of jumps and positive convenience yield. We develop a theoretical jump-diffusion model for options on spots and use simulations to evaluate non-linear parameter estimates. Data from the Deribit exchange is used to compare the performance of the jump-diffusion models with Practitioner Black-Scholes models. Using Diebold-Marino statistics and the absolute value error metric, we find that the jump-diffusion models significantly outperform the Practitioner Black-Scholes models. We conclude that Bitcoin behaves more like a commodity than a currency.

The third essay examines the impact of the Dodd-Frank Whistleblower program on firms' access to capital. In 2011, the Securities and Exchange Commission enacted a new Whistleblower program as a part of the Dodd-Frank Act in which eligible whistleblowers can receive financial awards ranging from 10% to 30% of the money sanctions from successful enforcement. Prior to this, many firms were already exposed to whistleblower laws with a bounty model under state False Claim Acts (FCA). Using a difference-in-differences approach, we find that firms not subject to state FCAs attracted more investment from non-local mutual funds after the enactment of the Dodd-Frank Whistleblower program. These firms also were more likely to issue new debt and less likely to issue equity, leading to higher financial leverage. However, more financially constrained firms were more likely to issue equity after the passage of the law. Taken together, our results highlight another benefit of the Dodd-Frank Whistleblower program, which is enhancing firms’ ability to attract non-local investments and improving firms’ access to capital.