Essays on financial markets and corporate outcomes

Resumen

The core work included in this thesis aim to provide a comprehensive understanding of the effect of financial markets on real corporate outcomes. In the first and core chapter of this thesis I investigate how an active options market for the stock affects a firm’s cost of debt. Specifically, I confront two potential channels of influence. On the one hand, option markets contain superior information that flows to stock prices, improving price informativeness and, ultimately, facilitating firm financing. On the other hand, I argue that the presence of an active options market for the stock exacerbates the classic conflict of interest between shareholders and bondholders. When shareholders can use option markets to maximize their profits (e.g., from certain events like a takeover or firm bankruptcy filing), incentives for risk-taking and debtholder expropriation increase. Consequently, bondholders will demand a higher return for their money, resulting in a higher cost of debt for the firm. Consistent with the idea of debt being a low information-sensitive security, I find that the expropriation channel dominates. Specifically, a one-standard deviation increase in options volume from its mean translates into an increase of 10bps in the at-issue yield spread. Overall, this paper provides a novel result in the literature that can be of tremendous importance for market regulators (option exchanges and listing decisions are under the jurisdiction of the SEC), investors, and firms. In the second chapter I tackle the question of whether financial derivative contracts such options promote or impede shareholder activism. Many voices on the professional and academic fronts have raised against the use of derivatives by shareholders, mainly arguing that these instruments provide shareholders with perverse incentives that exacerbate empty-voting behavior and discourage activism. Contrary to this generalized belief, I find that the existence of a more active options market for the stock encourages shareholder activism. This activism manifests in higher probability of a firm receiving a proxy contest or a shareholder proposal, as well as higher proportion of dissent voting with management. A deeper exploration of these results suggests that shareholders exploit option markets to gather additional trading profits, thus increasing net benefits from intervention and incentivizing active shareholder governance. Finally, I find that shareholder proposals forerun by larger trading in the options market are not significantly associated with lower subsequent equity returns, as empty-voting theories predict. In sum, these novel results provide investors, firms, and regulators with a new view on the role of derivative instruments in shareholder governance. In the third and last chapter of the thesis I focus on an specific group of investors in financial markets: hedge funds. Specifically, I analyze the role played by fund size in the universe of merger-arbitrage hedge funds. Contrary to the predictions of traditional active portfolio management models in which managers from large funds underperform as they suff er from diseconomies of scale, I show how managers from larger funds outrun their rivals when the number of arbitrage opportunities to exploit in the market is higher. Results are consistent with fund managers taking advantage of their larger size to exploit deal-increasing marginal returns by 'purchasing skill' in the form of superior resources.