Essays in information asymmetry, information acquisition, corporate governance, capital structure, and financial markets
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Information is a collection of data or knowledge about a specific topic. Information has its economic value because it allows individuals to make strategic choices that yield higher expected utility than they would obtain in the absence of information. Most commonly in finance research, information asymmetries are studied in the context of agency problems, where the separation of ownership and controls brings in conflicts between the management and the shareholders. In financial markets, firms' public information, private information, and the asymmetry between them play a crucial role in security issuing decisions, corporate capital structure decisions, and investors investing decisions. My research investigates the interaction between information environment, corporate governance, corporate financing decisions, and investors' trading behavior. The first essay of my dissertation examines pecking order theory and static trade off theory of capital structure with the natural experiment of SOX. SOX is the most important response to a series of high profile accounting scandals. It mandates better quality financial reports and more independent board. It could change firms' information environment and management career risk. I find that firms in general dropped leverage after SOX. Firms with larger information asymmetry ex ante dropped leverage more, and firms with more entrenched managers dropped leverage more. Managers have incentives to use leverage less than the optimal level, which is consistent with static trade-off theory and management entrenchment hypothesis. The second essay directly examines the empirical association between information acquisition and investor trading. It is often assumed that investors will adjust their portfolio when there is new information. With the availability of internet search volume, we could measure how intensive the investor's information acquisition is. We find that doubling abnormal search intensity is associated with about a 9% increase in abnormal trading volume. The positive volume-search association holds for both buyer- and seller-initiated trades, and is greater i) for large trades than for small trades, ii) when search from local investors is more intensive, and iii) during earnings announcement period. These results are consistent with an increase in disagreement triggered by information acquisition.