| While not devoid of sentiment, self-interested rational decision makers in traditional economic models are assumed to be immune to its influence. The purpose of this dissertation is to explore whether financial markets can be better understood when relaxing this important (but questionable) assumption and allowing subjects to be influenced by sentiment. In the first essay ("It pays to have friends" -- co-authored with Seoyoung Kim), we examine whether actions of corporate directors with social ties to CEOs are determined by communal norms, which promote mutual caring and trust, as opposed to pure self-interested exchange-based norms. Consistent with our conjecture, the results suggest that boards with more social ties to the CEO award compensation packages that are both higher in level and less sensitive to performance; boards with social ties are also less likely to fire the CEO. In the second essay ("Country-specific sentiment and security prices"), I add to the growing body of evidence suggesting that sentiment, while irrelevant to the decision at hand, has an important influence on decision making and market outcomes. Specifically, my findings imply that sentiment towards certain countries affects demand for financial securities from these countries and causes security prices to deviate from their fundamental values. In the third essay ("Distinguishing behavioral models of momentum"), I test the implications of two of the most prominent, recently proposed, sentiment-based models. I provide evidence consistent with one, but inconsistent with the other. |
