Two Essays in Financial Economics
This dissertation consists of two essays in ﬁnancial economics. The ﬁrst essay, included in Chapter 2, concerns abnormal stock returns around IPO lockup expiration events. IPO lockup agreements prevent existing shareholders from selling shares for a period of time, usually 180 days, following the initial public offering. Historically stocks exhibit negative returns on the date in which the lockup agreement expires, and thereby allows a previously restricted shareholder group to actively participate in the market. The effect is concentrated in companies backed by venture capital funding prior to going public. Given that the timing and details of the lockup agreement are publicly available, such a pattern should not exist in an efficient market. In this essay I examine the long term return pattern around IPO lockup expirations to determine whether there is evidence of market inefficiency or if market constraints limit arbitrage opportunities. Using a dataset of IPO activity from 1988-2014, I ﬁnd abnormal returns are highly persistent over the sample period despite a decline in bid-ask spreads and an increase in IPO lockup publicity. This ﬁnding is contrary to earlier studies that suggest trading costs and a potentially uninformed market contributed to the abnormal return pattern. I also ﬁnd suggestive evidence that the effect is not driven by short sale constraints that prohibit arbitrage traders’ ability to trade in the market. Finally, I simulate a trading strategy that allows me to implement liquidity controls and portfolio risk management constraints. I ﬁnd excess returns endure but are limited in scale due to low market liquidity. This result shows the abnormal return pattern is sensitive to the size of capital investment, which serves as a deterrent to market participants and plays a signiﬁcant role in the anomaly’s persistence.
The second essay, included in Chapter 3, examines the indirect impact of changes in supplier credit ratings on customer procurement decisions. This essay is co-authored with Xuan Tian and Han Xia. Existing research concludes credit ratings convey important information on ﬁrms’ credit worthiness. As a result, customers may rely on credit ratings to evaluate supply chain risks. We analyze whether customers modify purchasing behavior as a risk mitigation tool following changes in their suppliers’ credit ratings. Our identiﬁcation strategy incorporates a quasi-natural experiment around Moody’s 1982 ratings reﬁnement, and allows us to alleviate the potentially endogenous eﬀect of changes to ﬁrm ﬁnancial health that often accompany changes in credit ratings. We ﬁnd public sector customers respond strongly to supplier rating changes: they increase purchases from upgraded ﬁrms, and reduce purchases from downgraded ﬁrms. This response, however, is not observed for private sector customers. We show this contrast is likely due to government agents’ desire to respond to ratings, a prevalent and veriﬁable certiﬁcation, to signal that their decision-making is aligned with external assessment and to avoid reputational losses. We also ﬁnd suggestive evidence that powerful politicians use ratings to award government contracts to suppliers located in states they represent.