Three Essays in Financial Economic

This dissertation examines the role of manager's incentive and behavioral bias affecting their managerial decisions. The first essay (Changing Career Incentives and Risk-Taking in the Mutual Fund Industry) examines the career incentives of mutual fund managers and its relation to their risk taking behavior. In this chapter, I find significant changes in career incentives for mutual fund managers in recent years and corresponding shifts in managers' risk taking behavior. Successful funds receive less inflows in recent years, and poor performing funds are more likely to receive outflows. The termination decision has also become more sensitive to recent performance. Managers respond rationally to the changes in the career incentives by taking less risk. The increased performance scrutiny has fallen disproportionately on experienced managers. As a result, the Chevalier and Ellison (1999) finding that inexperienced managers take less risk than experienced managers is overturned in the more recent period, consistent with commensurate shifts in their career incentives. The second essay (CEO Home Bias and Corporate Acquisitions), coauthored with Clifton Green and Breno Schmidt, investigate the effect of CEO's home bias on firm's investment decisions. In this chapter, w e find that CEOs are significantly more likely to purchase targets near their birth place, consistent with either informational advantages or familiarity bias. Evidence from bidder announcement returns supports the latter view. Acquirer returns are significantly lower for CEO home bias acquisitions, and the relation is robust to controls for firm and industry characteristics. The negative announcement effect is stronger when the target is located further away, among poorly-governed firms, and when the CEO has a deeper birth place connection. CEOs' post-acquisition trading behavior also supports a familiarity bias interpretation. Our findings suggest that CEO home bias influences firm investment. The third essay (Off-style Holdings of Mutual Funds) examines whether mutual funds hold stocks that do not match their stated investment style on a regular basis, and explore the motivation behind such holdings. I find that funds hold a significant portion of their holdings in stocks that do not match their stated investment style (20%-35%), which is consistent with S.E.C. regulation 35d. The reason for holding "off-style" stocks could be because of information sharing between funds or "co-insurance" between funds. I find evidence that supports both.