Title: Three Essays in Law and Finance
Description: This dissertation examines three topics in law and finance. In Chapter 1, I show that consumers are more likely to keep a repayment promise they make themselves. When a scheduling conflict prevents a borrower from attending a mortgage closing, a Power of Attorney (POA) empowers a third party to sign the documents promising that the borrower will repay the loan. POAs arise after loan terms are locked in, making POA and non-POA loans virtually indistinguishable. Comparing within-borrower and within-property, I link POAs to greater delinquency and foreclosure. Loan performance data show that POAs are uncorrelated with cash flow shocks but reflect reduced promise-keeping conditional on financial distress. Consistent with prior work on salience and personal responsibility, promise-keeping is higher for loans serviced by the originating lender. Financial intermediation may play an important role in consumer lending. In Chapter 2, using a unique episode in which the SEC distributed securities disclosures to some investors before the public, we study the impounding of private information into stock prices.

Because the delay between the private and public release of the information was random, our setting offers a rare natural experiment for studying how markets process private information. As theory predicts, speculators seem to smooth out the price impact of their trading, and more information is impounded into prices during the expected rather than the actual delay before the information becomes public. Finally, we document investor overreaction when already-stale filings are publicly released. Finally, in Chapter 3, we use quantitative data to show a systematic relationship between the appointment of a hedge fund nominated director to a certain corporation and an increase in informed trading in that corporation’s stock (with the relationship being most pronounced when the fund’s slate of directors includes a hedge fund employee). From a governance perspective, activist hedge funds represent a new and potent force in corporate governance. This is the first attempt to investigate whether the activist hedge fund also imposes new agency costs through widened bid/ask spreads and informed trading.

We assembled a data set of 475 settlement agreements, between target companies and activist funds relating to the appointment of fund nominated directors, from 2000 and 2015, in order to focus on what happens once such a fund-nominated director goes on the board.