PERESS Joel

The thesis contains three essays. In the first essay, I investigate whether financial experts benefit from more machine-readable data in producing information in asset management. Exploiting an exogenous regulatory shock that makes firms' filings more machine-readable, I find that institutions with more financial experts have greater performance improvement than institutions with fewer financial experts, suggesting that financial experts benefit from more machine-readable data. This result allows for an assessment of the likelihood that algorithms will replace highly trained financial practitioners. In the second essay, I study the rationale and implications of the recent MiFID II regulation in Europe, which has made delegated asset managers' spending on sell-side analyst research more transparent to their clients. We show that transparency decreases the use of sell-side research but stimulates more buy-side research activity, which is consistent with the empirical results. Our model has additional predictions on managerial performance, liquidity, and social welfare. In the third essay, I study brokers in the private placement markets, who intermediate about 20% of the capital raised by non-financial firms in this market. I find that projects intermediated by brokers with better reputations are more likely to be fully funded. Contrary to existing theories about underwriters, projects sold through brokers are on average less likely to be fully funded and most issuers prefer direct sales. A model with both search frictions and asymmetric information suggests that these non-regularities may be due to the fact that the certification role of brokers is limited by competition between intermediated and direct sales. The model also explains some of the non-intuitive patterns of commission fees in the data. These results contribute to a better understanding of private equity markets and intermediaries in other financial markets.

This thesis consists of three papers. The first two papers study information flows in financial markets, and the third paper studies how mutual fund families can use relatively discretionary revenue streams to channel profits to specific funds within the family. The first paper, co-authored with Daniel Schmidt, studies price and liquidity spillovers in financial markets. Using a quasi-natural experiment, we show that investors observe stock prices to extract signals, and use them to make trades. In the second paper, I show that investment funds acquire information through the securities lending market. I show that active mutual funds sell stocks borrowed from them by short sellers, while index funds-which are prohibited from trading-do not. On the other hand, index funds are able to charge higher stock lending fees to borrowers. I attribute this to the fact that they are better lenders in the sense that they cannot use the information they get to trade, and thus profit from the information of short sellers. The third paper, also with Daniel Schmidt, studies the policies of fund families in allocating securities lending and lending income among member funds. We show that fund families deviate from the claimed fair allocation, directing more securities lending and loan profits to index funds. This finding is consistent with funds substituting lower management fees with higher securities lending income.

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The three chapters of this thesis study the financial choices of households over the course of their lives. In the first chapter, I use French administrative data on job-creating entrepreneurs to estimate a life-cycle model in which risk-averse individuals can start a business and return to wage employment. I estimate that the unobserved benefits of entrepreneurship amount to 6,100 euros per year, or 67,000 over the lifetime of a firm. In the second chapter, I estimate a portfolio choice model that takes into account the relationship between stock market returns and the asymmetry of idiosyncratic income shocks. The cyclicality of this asymmetry may explain why young or modestly wealthy households invest little in the stock market, and why the share of their wealth invested in stocks grows until retirement age.In the third chapter, I calibrate a portfolio choice model in which the labor market and the stock market are cointegrated. I estimate that the certainty equivalent of pension entitlements for employed households is 46% lower than the sum of annualized payments at the risk-free rate. At the national level, the adjusted value of pension entitlements is $19.6 trillion, or 37% less than the unadjusted value of $31 trillion.

The first chapter shows that the returns of funds invested in illiquid stocks ("illiquid funds") are better than those of funds invested in liquid stocks. This difference stems from the ability of illiquid funds to select stocks. Stocks held by illiquid funds perform better than portfolios that have the same characteristics. Liquid funds report benchmarks against which their returns are greater. A portfolio of stocks held by illiquid funds performs better than a portfolio of stocks held by liquid funds. The second chapter documents a predictability of returns. In this chapter, opportunity periods are periods when the returns of stocks that are regularly analyzed by analysts (the tracked stocks) deviate from those of stocks that are not tracked (the neglected stocks). Subsequent returns on easily valued stocks are greater when opportunities were great, compared to periods when opportunities were limited. This behavior is consistent with a model where investors demand a premium to bear the risk of adverse selection. The third chapter explores when investment funds change their investment style (style is defined as risk exposure, taking into account the usual risk factors). Funds do not take more risk when it would be more profitable to do so. After having had bad returns, funds move towards the style of similar funds, but which have had good returns. The style of young funds deviates from the style of older funds. New fund managers deviate from the style of funds with old managers. When a fund takes more risk on one side, it does not try to systematically address the other sides of the risk.

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This thesis is composed of three separate chapters. The first chapter shows that managers overreact to risks that come to their attention. After a hurricane, the shock to perceived liquidity risk produced by the disaster leads firms in the vicinity of the disaster area to temporarily increase their cash holdings while the actual risk has not changed. The second chapter shows that managers strategically influence investors' attention to earnings announcements by warning them of the date of the event at a later or later time. This strategy allows them to smooth the impact of bad results on their stock price over time. The third chapter studies the effect of league tables in M&A activities. League tables rank investment banks. A bank's league table ranking predicts its ability to generate new business in the future, which gives banks an incentive to manipulate their rankings.