Doctoral thesis

Essays in institutional investors, market efficiency and the real economy


154 p

Thèse de doctorat: Università della Svizzera italiana, 2021

English My dissertation consists of three chapters, each of which focuses on how institutional investors trade, impact price efficiency in secondary financial markets and influence the allocation of resources in the real economy. Using a novel approach based on hurricanes, the first chapter, Mutual Funds’ Fire Sales and the Real Economy: Evidence from Hurricanes, contributes to the recent debate on whether nonfundamental price variations affect real economic activities. Hurricanes create liquidity demand from investors living in disaster zones. This translates into additional outflows for mutual funds in the areas affected by hurricanes of about $2.5 billions. Such outflows cause fire sales, which are followed by temporary price drops in stocks unrelated to the natural disaster (-7% reverted within 10 months). The nonfundamental price decline induces firms to reduce investments by 4%. These results indicate that when the source of outflows is identified ex-ante and stems from investors’ liquidity needs unrelated to fund performance, the resulting nonfundamental price variations actually distort firms’ real decisions. The second chapter, Strategic Trading as a Response to Short Sellers, studies whether short selling deters the incorporation of positive information. Using the Reg SHO experiment to avoid endogeneity in short selling, we find that, in the case of positive news, the amount of information that prices reflect is 18% lower when short selling is more aggressive. Consistent with a strategic behavior, we show that institutional investors slow down significantly their buy trades and break their orders across multiple brokers when short-selling activity is more pronounced. These findings suggest that short-sellers hinder price discovery when better-informed investors are present in the market. The third chapter, Institutional Investors and the Announcement of Share Repurchases, focuses on institutional trading around buyback announcements. We find that mutual funds are significantly more likely to liquidate their positions and sell about 1% of a firm’s share outstanding in the year after the announcement. The identity of the counterparty is important, as the stocks of repurchasing firms tend to outperform the market over the long-term. Thus, the investors who sell their securities to the repurchasing firms may forgo some profitable investment opportunities. Consistent with this view, we find that in the week after the announcement when the stock price increases the most, mutual funds have a lower propensity of selling the announcing firm compared to similar non-announcing firms. The tax status and the capital gains overhang of the liquidating investors influence their tax burden. In line with this, we find that investors in firms that repurchase their shares tend to liquidate the positions with relatively low embedded capital gains, reducing their tax burden.
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