Area: Finance

Committee members: Dr. Suzanne Lee (Chair), Dr. Sudheer Chava, Dr. Alex Hsu, Dr. Soohun Kim, and Dr. Shijie Deng (ISyE)

Title: Essays on Information and Asset Prices

Essay I: Complementarity of Passive and Active Investment on Stock Price Efficiency

I investigate the collective impact of passive and active investment on stock price efficiency using a quasi-natural experiment. I document an improvement in efficiency due to an exogenous increase in passive investment, specifically in stocks widely held by actively managed funds. These active funds are compensated with higher realized returns after an exogenous increase in passive investment. I use the reconstitution of Russell indexes as an instrument. My findings suggest that active funds seek out inefficient stocks and ultimately experience superior returns due to the improvement in efficiency from passive investment. An increase in analyst following and a decrease in analyst forecast dispersion are identified as economic channels of the efficiency improvement. Overall, my results highlight the complementary role of passive and active investment on price discovery due to symbiotic nature of their existence.

Essay II: The Role of Efficient Analysts in Stock and Option Markets

We investigate the fundamental role of security analysts contributing to the improvement in stock price efficiency. We distinguish efficient analysts from noisy analysts using the signal-to-noise volatility ratio constructed with high-frequency data. Our analyses show efficient analysts' recommendation revisions significantly influence both stock and option markets, unlike revisions made by noisy analysts. We find only efficient analysts' recommendation revisions generate significant abnormal stock returns in expected directions. We also identify efficient analysts' recommendation revisions significantly increase option market activities associated with informed trading. We discover that these revisions resolve uncertainty about a firm and reduce jump risk in its stock price.

Essay III: Realized Skewness for Information Ambiguity

We propose realized skewness constructed using high-frequency data as a measure of information ambiguity. We show a significant decrease in realized skewness around analysts' earnings forecasts and recommendation releases, indicating that ambiguity-averse investors respond to intangible information asymmetrically. We document that negative realized skewness predicts subsequent lower returns around information releases after controlling for return continuations. A zero-net investment strategy incorporating our finding achieves a Sharpe ratio of 1.766 with 0.83% of monthly average returns. Our finding suggests ambiguity-averse investors not only respond negatively but also under-react to hard-to-interpret news releases.