title: Three Essays in Financial Economics
Creators: name: Jakob, Sascha
Publisher: name: Universität Bern
Year: 2023
Subjects: subject: 330 Economics

description: This thesis encompasses three essays, each of which examines the role of information in a specific setting arising in financial economics. Thus, each essay contributes to the literature about the role of information in financial markets and to the debate whether financial markets are efficient or not.
The first essay aims at understanding what market participants learn from corporate repurchase announcements and the objective is to deepen our understanding about the nature of information contained in repurchase announcements of firms. By applying a method from asset pricing we extract information about a firm’s cash flows and its risk from stock returns. We present evidence that repurchase announcements contain information about a firm’s risk when that firm is underpriced. More specifically, we show that market participants learn that their current assessment of the firm’s risk is inaccurate and too high given the information that is available to them. Importantly, no new fundamental information about the firm’s risk is contained in the repurchase announcement. This initiates a correction of the perceived risk ultimately leading to an appreciation in the firm’s stock price. The paper makes at least two contributions to the literature. First, it contributes to the literature on the anomalous behavior of stock returns around share repurchase announcements. Second, the paper adds to the literature on the information content of share repurchases.
The main objective of the second essay is to provide novel insights on whether mutual fund managers possess skill and are not simply lucky when allocating their assets. To that end, I introduce a novel measure that captures whether fund managers can anticipate how stock prices will react to changes in the aggregate market’s expectations about the values of stocks, and adjust their fund holdings accordingly. In my setting, the market changes its expectations about the value of a stock due to firm-specific information and information about the entire financial market. I show that fund managers are able to anticipate changes in market expectations that are driven by firm-specific information but not those driven by information that affects the entire financial market. This suggests that mutual fund managers excel and are more precise at acquiring, processing, and using firm-related information for investment decisions. Furthermore, I show that this ability is only prevalent when a fund management consists of a team but not when it consists of one individual manager only. Finally, I show that firm-specific information in stock prices is less complete than market-wide information, Thus, I provide one possible mechanism that explains why anticipation of changes in the market’s expectations driven by firm-specific information is rendered possible. The contribution of this paper is at least threefold. First, it contributes to the vast literature on the skill of mutual fund managers. Second, it enriches the literature devoted to examining the skill difference between team-managed funds and single-managed funds. Third, the paper examines whether the informational inefficiency of stocks is related to managerial skill.
The third paper proposes an information theoretic approach to measure the extent to which prices in financial markets reflect all available information. The measures draw on the idea of return predictability and are directly linked to the Efficient Market Hypothesis. The primary duty of the measures is to identify periods where assets or entire financial markets are inefficient in that they do not reflect all available information, such that active asset allocation might become profitable. Using these measures, we propose market timing strategies and provide timing measures for two of the most important and most established financial market phenomena, value and momentum. We also document that market efficiency is cyclical for the U.S. stock market and varies over time. The contribution of this study is severalfold. In general, the study contributes to the discussion about efficient markets. First, it contributes to the literature on market timing. Second, it adds to the literature that examines the performance of active investment. Third, it contributes to the literature of price efficiency measures. Finally, the paper contributes to the research that adopts ideas from information theory and maps it to financial markets.
Collectively, this thesis contributes to the debate whether financial markets are efficient or not. The first essay finds that financial market participants have erroneous expectations about the risk of certain firms, suggesting that their information processing is flawed at times. The second essay shows that skilled fund management structures are able to anticipate how the aggregate market’s expectations about a stock will shift, implying that information is not always fully and instantly reflected in financial markets. The third essay finds that assets can be informationally incomplete such that financial markets can be timed. Thus, the thesis concludes in the spirit of Grossman and Stiglitz (1980): It is impossible for financial markets to be informationally efficient at all times.