Essays on the role of information in financial markets

Abstract

"This Ph.D. dissertation comprises three essays on the role of information in financial markets. The first essay examines the impact of the introduction of a minimum buyback mandate in open market repurchases. In line with our theoretical model, we find that the mandate strengthens the informational role of open market buybacks which can be attributed to the higher cost of buyback announcements. This is evidenced by a significant increase in the abnormal stock returns around the buyback announcements and insiders purchasing buyback firms’ stock against increased selling in the period without the minimum buyback. The market timing associated with buyback execution declines, accompanied by a more consistent buyback intensity, implying a weaker instinct for opportunistic buybacks. Furthermore, implying a significant decline in the option value associated with open market buybacks, we also document an increase in the propensity of firms with more illiquid stocks to buyback through fixed price tenders. Our findings suggest that the regulatory change has lowered the ‘cheap-talk’ motives associated with the announcement of open market buybacks. In the second essay, we investigate how risk information is inferred in normal and turbulent markets. The study focuses on two potential sources of risk information, earnings announcements of firms and changes in the market risk premium. We employ a recently proposed measure to infer the risk information that limits the impact of event risk while estimating forward-looking information from option prices. We find that both earnings announcements and the changes in market risk impact firm-level discount rates, but both sources exhibit a significant time variation. The spillover from the market is lower in favorable market conditions while it has a stronger impact on firm risk information compared to firm announcements in crisis periods. Using COVID-19 as an exogenous shock, we show that the spillover of risk information from peer firms becomes insignificant during a crisis period while a firm’s own earnings announcements have a diminished role in impacting firm risk information. The results indicate lower attention to firm-specific risk factors in times of a systemic crisis, in contrast to normal times. In the third essay, we propose novel and intuitive measures of investor disagreement that capture hitherto unknown dimensions of disagreement. Our measures are based on an appropriately weighted statistical distance between the components of a mixture lognormal distribution. While we find that some of our measures have a positive correlation with existing measures, we show that our measures capture dimensions of disagreement not captured by the existing measures. In addition, our measures allow us to recover belief disagreement, free from time-varying preferences, which is not possible with the existing measures."