Essays on Financial Markets
This thesis consists of five chapters. Chapter 1 is the preliminaries. Chapter 2 to chapter 4 are the three main chapters of this thesis, which covers the U.S. market, international market, and the Chinese market, respectively. Chapter 5 is the discussion.
Chapter 1 is the preliminaries. It introduces the setting and motivations for the three topics covered in this thesis.
Chapter 2 investigates how equity exchange-traded fund (ETF) ownership affects the cost of debt. I find that, by facilitating short-selling activities to execute disciplinary effects, equity ETF ownership decreases a firm's cost of debt. This negative association between equity ETF ownership and the cost of debt is more pronounced for firms with weaker information environments and lower bond ratings. The disciplinary effect works through a more active short-selling market provided by equity ETF ownership. However, I fail to establish the corporate governance channel, which is consistent with Schmidt and Fahlenbrach (2017) and Heath, Macciocchi, Michaely, and Ringgenberg (2021).. Those results are also robust to endogeneity.
Chapter 3 studies the predictive power of the trend strategy in the international stock market. Using data from 49 markets, I find that a trend signal exploiting the short-,intermediate-, and long-term price information can predict stock returns cross-sectionally in the international market. The significance of the trend strategy is associated with market-level characteristics such as macroeconomic conditions, culture, and the information environment. The trend premium is more pronounced in markets with a more advanced macroeconomic status, a higher level of information uncertainty and individualism, and better accessibility to foreign investors. Nevertheless, the trend strategy only outperforms the momentum strategy in a relatively short horizon.
Chapter 4 investigates whether margin-trading in the Chinese stock market reflects information or sentiment. At the aggregate level, I find no evidence of information-driven or sentiment-driven margin-trading behavior. At the individual stock level, both information-driven and sentiment-driven margin-trading exists, which are relevant to firm characteristics. I also find the likelihood of sentiment-driven margin-trading significantly declined after the regulator enforced tighter rules for margin-trading in 2015.
Chapter 5 summarizes the main findings of the three topics, discusses the implications of the findings, and points out the future direction for research.
