| The primary aim of this dissertation is to take a broad approach toward resolving neoclassical models with a number of stylized empirical findings by introducing market frictions and market participants' opportunistic behavior. The first chapter of this dissertation explores how earnings management influences asset returns and return volatility via real economic activity. In the model, firms smooth earnings via the costly and economically suboptimal intertemporal transfer of assets and liabilities. As a result, the firm's stock return follows a process that conforms to an EGARCH-like statistical model. The key idea is that real earnings management generates an unobservable cost, and the market has to infer the underlying wealth of the firm from the smoothed reported earnings series. This framework may help explain why asset returns underreact to good news and overreact to bad news, while no news is always good news to the market. The second chapter of this dissertation explores the roles played by idiosyncratic risk and liquidity in determining stock returns by using the EGARCH statistical model to estimate the idiosyncratic risk of the stock returns. Overall, using monthly data, this chapter finds that stock returns are increasing with the level of idiosyncratic risk and decreasing in a stock's liquidity. However, while both liquidity and idiosyncratic risk play a role in determining returns, the impact of idiosyncratic risk is much stronger and often eliminates liquidity's explanatory power. The point estimates indicate that a one standard deviation change in idiosyncratic risk has between 2.5 and 8 times the impact of a corresponding change in liquidity on cross sectional expected returns. The third chapter extends the scope of analysis to emerging market by providing a set of empirical tests of the cross-sectional variation of stock volatility and investability, where investability is defined as the degree to which a stock is accessible to foreigners. Our results show that there is either a negative relationship between investability and return volatility for individual stocks in the Chinese and the Philippines' stock market. |
