Three essays in financial economics

This dissertation presents three essays in financial economics. Section 1 presents an empirical study on institutional investor activism. It shows that firms with large public pension fund (PPF) shareholders engage in less mergers and acquisitions activity and in smaller deals, while firms with large insurance or investment company shareholders engage in more M&A activity and in larger deals, after controlling for firm-level governance provisions, firm characteristics, and ownership endogeneity. Although the presence of PPF ownership is not significantly associated with bidder announcement abnormal returns, it is significantly and positively associated with long-term M&A abnormal returns including the announcement month, and with post-M&A improvement in asset turnover rates. The findings in this study suggest that public pension funds are the most likely monitors of corporate governance, whereas investment companies are the least likely monitors.; Section 2 offers a mechanism different from Shleifer and Vishny (1986), by which an external monitor can add value. In this two-period model with uncertainty of managerial quality and noisy but informative private information, limited improvement in investment efficiency is an equilibrium outcome, and the monitor may give up monitoring due to the added cost of uncertainty. The model highlights the limitation of external monitoring, and provides a theoretical explanation for the empirical finding that only the activist institutions can reduce corporate mergers and acquisitions activity. It also offers testable prediction regarding managerial investment behavior and performance. It may offer an explanation for the fact that there are very little overlapping in block holdings among the activist institutions.; Section 3 presents new evidence that past industry conditions can predict future IPO underpricing, long-term IPO performance, and IPO volume. Moreover, the impact of industry conditions is economically large. After controlling for variables known to predict initial returns, we find that high underpricing industries are those with (1) lower leverage, (2) higher share turnover, (3) lower book to market ratio, and (4) smaller size. Furthermore, we find that IPOs in industries with (1) lower concentration and (2) lower leverage experience superior performance in the three years following their IPO. Industries with higher concentration also experience higher future IPO volume.