Essays in financial economics

This thesis consists of three essays in financial economics. Chapter 1 is entitled "Inside Debt." Existing theories advocate the use of cash and equity in executive compensation. However, recent empirical studies have documented the prevalence of debt-like instruments such as pensions. This chapter rationalizes the use of such inside debt as an effcient solution to the agency costs of debt. Owing to its greater sensitivity to liquidation payoffs, inside debt is more effective at optimizing project selection than the bonuses, private benefits and reputational concerns advocated by prior literature. Contrary to intuition, it is typically inefficient to align the manager with firm value by granting him equal proportions of debt and equity. Chapter 2 is entitled "Sports Sentiment and Stock Returns" and co-authored with Diego Garcia and Oyvind Norli. We investigate the stock market reaction to sudden changes in investor mood. Motivated by psychological evidence of a strong link between soccer outcomes and mood, we use international soccer results as our primary mood variable. We find a significant market decline after soccer losses. For example, a loss in the world Cup elimination stage leads to a next-day abnormal stock return of -49 basis points. This loss effect is stronger in small stocks and in more important games, and is robust to methodological changes. We also document a loss effect after international cricket, rugby, and basketball games.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2007

Author dc:creator

• Edmans, Alex

Advisor dc:contributor.advisor

• Stewart C. Myers.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/40855

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/40855