Essays On Information Asymmetry In Equity Market
Information asymmetry is a common phenomenon everywhere. This dissertation studies this phenomenon through observing the equity market both in the developed country and in the emerging market and observing both the initial price offering market and the secondary equity market. Chapter one develops a simple model that relates the clustering of IPOs to moral hazard. The number of IPOs in the economy is shown to be a decreasing function of agency costs. The paper uses a framework in which agency costs linked to entrepreneur net worth are related to the business cycle. It is shown that when business activity is high(low), agency costs from moral hazard are low(high). Then, our model yields the stylized fact that the number of IPOs is highest around equity prices' peaks. Based on the data from 1970 to 2008, it is found that the current ratio, the quick ratio, and the cash ratio are positively related to the number of IPOs in the economy, and that the number of bankruptcy filings is negatively related to the number of IPOs in the economy. Chapter two studies a phenomenon in China's stock market. Listed firms bought and sold other listed firms in 2007 when the market was booming so that their net earnings were boosted. The paper finds that those that participated in these stock transactions and relied heavily on these earnings in 2007 benefited from the booming stock market and had positive growth in investment income in 2007, which lead to positive growth in net earnings in 2007. These firms suffered from the declining stock market in 2008 and had a negative growth rate in investment net income in 2008 and, thus, a negative growth rate in net earnings. This earnings reversal is proved by the smaller earnings persistence of investment net income than that of main operating income. The stock price acts as if investors correctly understand the information in the main operating income and the investment net income jointly.
Dissertation or Thesis