Essays in finance: The impact of trust, firm efficiency, investor relations, and operational leanness on financial markets

Abstract

This dissertation consists of four essays and aims to contribute to a better understanding of financial markets and investor behavior. The first three essays focus on the effects of the COVID-19 crisis, which constituted an exogenous shock to a firm’s future cash flows and thus led to market collapse. Given the dramatic downturn, the COVID-19 crisis presents an opportunity to examine how market participants evaluate the importance of certain firm characteristics for the firm’s ability to generate future cash flows and also how characteristics of countries and societies influence capital market outcomes. In Essay 1, we therefore provide evidence that societal trust and trust in the country’s government significantly reduced stock market volatility in reaction to COVID-19 case announcements during the crisis period. We relate this result to trust alleviating uncertainty among investors about the country’s ability to overcome the crisis. In Essay 2, we show firms which use their resources more efficiently to experience higher returns during the crisis. We argue that the outperformance of efficient firms relates to these firms having less risky expected cash flows and thus a lower risk of default, which is consistent with the view in Frijns et al. (2012). In Essay 3, we study whether having better-quality investor relations (IR) helps to alleviate information frictions among market participants and is thus valuable for firms. The results suggest that firms with better-quality IR experienced higher returns, retained more incumbent institutional investors, and also attracted more new institutional investors during the crisis period. Finally, Essay 5 moves away from the topic of the COVID-19 crisis, but it also contributes to a better understanding of financial markets and investor behavior. In this last essay, we examine whether institutional investors view operational leanness as a competitive advantage resulting in higher expected cash flows. The results provide evidence that institutional investors generally appear to prefer lean firms since the reduction in operational slack is associated with a cost advantage. However, the results also suggest that institution types differ substantially in how they evaluate operational leanness because of market and information frictions.