Essays in finance, law and economics
By: by Mario Gamboa-Cavazos
Published: 2007
Language: eng
Number of pages: 170
Description: This dissertation consists of three essays exploring the intersection of finance, law and economics. The underlying theme throughout this research is the role that institutions play in shaping economic analysis. Whether institutions add a layer of frictions or enhance economic efficiency, they must be seen as an integral part of the economics field. In the first essay I analyze the legal institution of bankruptcy law and its effect on economic outcomes. In the second essay I study the way corruption arises under a given institutional setting. And in the third essay, I explore the implications of institutional constraints for financial markets' efficiency. The first essay empirically assesses bankruptcy as a legal process. I examine a comprehensive reform to corporate bankruptcy law in Mexico, which streamlined the legal process and limits on litigation. Then I outline the ways in which bankruptcy law design affect a series of outcome variables. Using a hand-coded data set from court dockets, I measure procedural speed, recovery rates of creditors' claims, and violations to the absolute priority rule (APR); we also track and compare litigation throughout the bankruptcy process. My investigation of the reform finds: (1) a decrease in the average time spent in bankruptcy from 7.8 to 2.3 years; (2) an increase in average recovery rates from 19 to 32 cents on the dollar; and (3) a decrease in the frequency of APR violations from 29 to 2 percent. Structural and administrative changes explain about 50 percent of the improvement in outcomes variables, while changes in the regulation of the process, particularly on the ability to litigate, explain the remaining portion. More precisely, strategic litigation is strongly associated with lower recovery rates and longer procedural times. The results are not driven by censoring bias and are robust to time-, firm-, and court-specific considerations.

Our findings suggest bankruptcy law reform should be focused on simplifying the legal process, introducing statutory timelines, and restricting litigation. The second essay studies the form by which corruption is organized between politicians and entrepreneurs. Using a large-scale survey with data on extra-official payments, and exploiting variation in the gubernatorial office terms and in the market structure across states in Mexico, I examine the manner in which political horizons and industry concentration affect the extent of corruption. The primary finding is a non-linear relationship between corruption and political horizons. Specifically, corruption is more intense over long and short political horizons, and less intense over intermediate ones. I associate this result with a combination of "horizon" and "capture" effects. In the first, politicians prey more intensely on firms as their window of opportunity shortens, and thus command large corruption payments. In the second, entrepreneurs tend to bribe government officials over long and feasible policy horizons, and thus increase their corruption offerings. I also find evidence of a "rent" effect, where firms that accrue higher rents are more sensitive to the length of political horizons. In particular, firms operating in concentrated industries pay larger bribes over long horizons and lower bribes over short horizons, uncovering their special interest nature. My investigation underscores the importance of transparency in public-private dealings, especially in constituencies where political accountability is weak. The third essay investigates which factors influence short interest changes. I find that short sellers cover their positions after suffering losses and increase them after experiencing gains.

While this relationship is very strong for positions established due to perceived overvaluation, it does not hold for arbitrage trades, where the investor is hedged against stock price movements. Finally, expected returns do not explain the documented short seller behavior, at least in the case of loss-induced covering. I interpret these results as evidence that even sophisticated investors cannot or are not willing to maintain positions after adverse market movements, making arbitrage less effective than envisioned by the efficient market hypothesis.
Notes: "May 2007."

Thesis (Ph.D., Dept. of Economics)--Harvard University, 2007.

Includes bibliographical references.