Essays on Trading Strategies,Corporate Activities, and FirmPerformance

Abstract

This thesis focuses on three research questions in the areas of empirical asset pricing and corporate finance. I introduce the overview in the first chapter and conclude in the final chapter. In the second chapter, we investigate the impact of the beta’s statistical significance on the performance of the betting against beta (BAB) portfolios in the U.S. and major international markets. After dropping stocks with statistically insignificant betas, we find that a betting against statistically significant beta strategy reduces the monthly alphas of BAB portfolios by 20% – 50%, depending on beta estimation methods. If we replace the value of statistically insignificant beta by zero, a refined BAB strategy can generate a higher alpha than the original BAB strategy. In the third chapter, we find a negative relationship between abnormal investment and future stock performance in the U.S. market. This negative relation is mainly driven by firm under-investment, not over-investment. Our explanations can be that market investors may not react promptly to the fundamental information contained in under-investment about a firm’s future profitability, asset growth, and financial distress probability. Alternatively, the negative relation between underinvestment and future stock returns is more pronounced for firms with lower investor monitoring and higher agency costs. In the fourth chapter, we identify a positive link between peer firms’ investment and focal firm’s value of cash holding in the U.S. market. This effect is likely to result from the positive externalities brought by peer investment which are reflected in young and growing industries with ample investment opportunities that are shared by the focal firms. We find little evidence to support either the precautionary hypothesis or the learning hypothesis. Our further analyses show that firms increase their level of cash holdings while peer investment increases. Meanwhile, firms are less willing to use cash for dividend payments while they are more willing to use it for capital expenditure and R&D investment.