In the first chapter, I show that mature patent-practicing firms respond to windfall profits derived from exogenously extended patent protection time by engaging in external patent acquisitions that diversify their patent portfolios into new technologies. By exploiting the random timing of patent term expiry dates and their unexpected extensions due to the Uruguay Round Agreements Act, I find that a one standard deviation increase in the citation-weighted patent portfolio share of term-extended patents leads to an increase in cash flow by 1.5 percent of book assets. Given these windfall profits, I find evidence of physical capital investment, debt issuance reduction, and acquisitions of new external technologies. Internal investments in R&D, on the other hand, show no response, suggesting high R&D adjustment costs for large, mature firms. In the second chapter, I find that being connected to directors who are or had been board members at bankrupt firms at the time of bankruptcy filing limits the efficacy of business networks in searching for directorships. Assuming that corporate bankruptcies can weaken interpersonal ties among directors, I exploit a quasi-natural experiment to investigate the degree to which director turnover is dependent on professional connections forged from current and past board memberships. By comparing directors who are indirectly linked to bankruptcy-filing firms through their professional networks to those without this indirect link, I find that a director's chances of finding additional directorships within a 1-year period are lowered by over 10 percent on average after losing a set of connections due to corporate bankruptcies. This decline in director mobility is concentrated mostly among highly central directors and directors with board positions at firms with high G-Index measures, suggesting that the dependency on personal ties is stronger among firms with weak shareholder rights. In the third chapter, we explore the proxy voting patterns of passive mutual funds. We find that passive funds disagree with management more frequently than active funds within fund family. Additionally, voter efficacy between passive and active funds are not equal across agenda item categories.

The first chapter of this dissertation revisits discount rates. In a recent article "On the Timing and Pricing of Dividends", van Binsbergen, Brandt, and Koijen (2012) empirically investigate term structure properties of the equity premium by recovering prices of the short-term component of the market index. Their finding of a downward-sloping term structure of the equity premium contradicts predictions of many leading consumption-based asset pricing theories. In this paper, I provide an alternative explanation and show that the higher average rate of return on the short-term component of the index, as extracted by BBK, is fully explainable by the fact that investors are compensated for the extra tax burden of dividends on the ex-date and does not represent compensation for risk.

The second chapter of this dissertation is co-authored with Raymond Fisman and Vikrant Vig and is titled "The Private Returns to Public Office". In this paper, we study the wealth accumulation of Indian state politicians using public disclosures required of all candidates. The annual asset growth of winners is 3-5 percent higher than runners-up, a difference that holds also in a set of close elections. The relative asset growth of winners is greater in more corrupt states and for those holding ministerial positions. These results are consistent with a rent-seeking explanation for the relatively high rate of growth in winners' assets.

My dissertation has two chapters. The first chapter is titled "Analysts' reinititations of coverage and market underreaction". I study a signal which has been completely ignored by the literature so far: reinitiations of coverage. Reinitiations are defined as the resumption of coverage of a stock by a broker after more than six months of interruption. They are associated with a significant short-term market response, in particular when the same analyst is assigned to the stock. However, this market response is incomplete. Interestingly, the price patterns that follow the issuance of regular upgrades of recommendation and reinitiations differ significantly, and this paper can help us better understand the phenomena of market underreaction and overreaction. Prices adjust quickly after a regular upgrade, while reinitiations are followed by a sustained price increase in the following six months. I assess the economic magnitude of this initial underreaction by setting up a trading strategy. Reinitiations of coverage are the only type of recommendation that delivers significant positive abnormal returns after transaction costs with a three- and six-month investment horizon. I investigate several explanations in relation to gradual information diffusion, limited attention and changes in firm profitability. Portfolio sorts on proxies for market attention indicate that firms subject to a lower level of initial attention experience the strongest cumulative abnormal returns. Reinitiations also coincide with improvements in firms' profitability.

The second chapter is co-authored with Ivo I. Welch and is titled "Are Economic Tracking Portfolios (ETP) useful? And What Fundamentals Are Driving Stock Prices?". Our paper shows that equity-based economic tracking portfolios, ([BGL89], [Lam01]) constructed from the ten Fama-French industry equity portfolios and three bond portfolios could not usefully track selected macro-series (inflation, industrial production growth, consumption, real estate, exchange rates, and oil) any better than simpler benchmarks (a constant, the T-bill, the S&P500, and/or a single stock). This suggests that the in-sample ability of ETPs to track macro-series was likely just overfitting. In most cases, the zero constant and/or Treasury Bill tracked best. This reinforces perhaps the most fundamental mystery in finance: what economic variables, if any, are really driving stock prices ([Rol88])?

We develop a model of a firm owned by shareholders and administered by managers who may be either honest or dishonest. When managers have an informational advantage but shareholders retain control, dishonest managers can make false reports that distort investment and thereby reduce firm cash flows. When dishonest managers have privileged access to both information and control, firm value is further reduced and profits are diminished especially in the worst states of the world. Ine®ective corporate governance combined with corruption (dishonesty) thus increases firms’ exposure to systematic risk. In a cross-country empirical test of the model, we find that corruption substantially increases firm betas, particularly in countries with weak shareholder rights. Moving from the level of corruption in Canada to that in South Korea raises industry-adjusted betas by 0.35.

We present a dynamic model of production in which a firm’s output increases when its managers share their information. Communication of ideas depends on the quality of the firm’s internal language. We prove that firms with richer languages (i.e., more organizational capital) will have higher market values. Organizational capital generates static complementarities among incumbents which implies that firms with richer languages will experience greater employee retention and higher wages. Dynamic complementarities between intertemporal investments in language generate long-run persistence in firm market-to-book and turnover ratios. We demonstrate that the optimal compensation of incumbents includes an earnings-insensitive component that is larger in firms with richer languages. In a simple model of mergers, we show that the most value-creating mergers are those between firms with highly disparate languages.

In the first chapter of this dissertation, I show that firms strategically liquidate their growth options and reputational capital after loan covenant violations. Loan covenant violations increase creditors' relative bargaining power, shifting control rights towards debt holders. I use Amazon product metadata and product reviews in an event study framework to identify changes firms make to their product strategies after these violations. In the two quarters after new loan covenant violations, firms decrease both their product portfolio size and their product quality. I use product review text to show that firms actively reduce product quality by increasing the rate of product failure. These changes increase short-term cashflows, consistent with firms' decisions aligning with creditors' incentives. Violating firms apply these changes strategically within their product portfolios. After covenant violations, firms cull the set of products sold in product markets with more competitors and lower the quality of their less popular products. These strategic decisions reduce the long-term costs of changing product quality and product portfolio size.

In the second chapter of this dissertation (with Nimesh Patel), we find that domestic firms invest in their reputational capital in response to increases in international competition. Specifically, American firms increase the quality of their products after positive Chinese import competition shocks. We determine that this is an active decision by identifying product level changes, finding significant reductions in the rate of product failures for domestic firms. Firms build reputational capital by increasing product quality, allowing them to differentiate their products from those of their competitors. We find that product portfolio size attenuates our results, consistent with less diversified firms having greater incentive to differentiate their products.

In the third chapter of this dissertation, I study the effects of initial public offerings on product quality. Public firms, unlike private firms, are required to regularly disclose financial and business information. The relative lack of information on private firms that results from this regulatory difference makes quantifying how firms change as a result of going public difficult. I use Amazon product data spanning both private and public firms in an event study framework to identify a decrease in product quality after firms complete their initial public offerings. I find that the decrease in product quality after firms go public is driven by an increase in both the rate of negative brand recognition and the rate of negative customer service experiences.

In the first chapter of this dissertation, I find that financially constrained mortgage servicers destroyed substantial MBS investor value during the financial crisis through their management of delinquent mortgages. Servicers have a contractual obligation to advance to the investors any monthly payments missed by borrowers. This chapter shows that, in order to minimize this obligation to extend financing to distressed borrowers, constrained servicers aggressively pursued additional foreclosures and modifications at the expense of MBS investors, borrowers, and future mortgage performance. IV regressions suggest that servicers' financial constraints caused 440,712 additional foreclosures. A one standard deviation increase in servicer financial constraints led to an average reduction in investor value of $22,298 per loan-causing aggregate investor value destruction of $84 billion.

In the second chapter of this dissertation, I describe an important borrower risk factor observed privately by the issuer of non-agency RMBS. The private information available to the issuer is drawn from behavioral cues exhibited early in the life of the loan. Mortgage borrowers that make their first six payments at least a day prior to the due date are 14.8 percentage points less likely to become delinquent (equivalent to a 91-point increase in FICO score). This effect is persistent, unobservable at loan origination, and privately observed by the issuer prior to securitization. Both the credit rating agencies and the investor do not appear to be aware of this risk factor. Surprisingly, issuers are quicker to securitize loans with positive private signals rather than less promising loans.

In the final chapter of this dissertation (with Mark J. Garmaise and Gabriel Natividad), we analyze competitive dynamics in the mortgage market. Using discontinuities in mortgage acceptance models to generate shocks to a bank's current local lending, we show that future applicants are attracted to growing lenders. Local mortgage markets resemble tournaments: a bank's originations are reduced by the lending of its quickest-growing competitors, not that of its overall competitors nor of its largest competitors. Moreover, future lending activity is convex in current originations. Tougher competition leads a bank to charge higher interest rates, partially due to the increased risk of its loans, and results in worse mortgage performance.