Essays in empirical finance

The dissertation comprises of four essays that studies incentive structure in the asset management industry as well as the cross-section of corporate bond returns.;The first essay tests the corporate theory of managerial herding based on reputation and career concerns by focusing on the mutual fund industry. We investigate the trade-off between reputation and compensation and study how incentives in the advisory contract affect managerial herding. We show that a high incentive contract induces entry in categories in which an extreme performance realization is more likely and the adoption of trading strategies different from the ones being followed by other funds. Family affiliation reduces the tendency to herd and therefore, reduces the need for high incentive contracts.;The second essay studies one of the potential causes of the financial market bubble of the late 1990s: herding behavior of mutual funds. We show that the incentives contained in the mutual funds' advisory contracts induce managers to reduce holdings of bubble stocks. The differential exposure to bubble stocks significantly impacted the funds' performance both in the period prior to March 2000 as well as afterwards.;The third essay studies the impact of contractual incentives on the performance of mutual funds. We find that high incentive contracts induce managers to take more risk and reduce the funds' probability of survival. Yet, funds with high incentive contracts deliver higher risk-adjusted return and the superior performance remains persistent. High-incentive winner funds from one year have a positive alpha of 0.41% per month in the following year. Focusing on funds' holdings, we show that active portfolio rebalancing is the main channel through which incentives increase performance.;The fourth essay analyzes the effect of idiosyncratic equity volatility on corporate bond spreads and returns. I show that a larger proportion of idiosyncratic volatility in the total volatility of a firm's equity return implies a higher spread on the bonds issued by the firm. I also find the novel result that such bonds provide low future average returns. The results indicate that equity and debt have higher correlation for firms with a higher proportion of idiosyncratic volatility.