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UBC Theses and Dissertations

Essays on legal financial institutions Pizarro, Jose


An important focus of the financial literature has been the role of legal institutions in the development of financial markets, and its impact on the long-run economic growth and welfare. This work contributes to this literature by studying the impact of three legal institutions on asset prices, the decisions of firms and households, and the sustainability of regulated markets. The first legal institution considered in this thesis is the personal bankruptcy code. Specifically, I study how the protection that this institution provides to households impacts the loan market equilibrium. The second legal institution is the total allowable catch (TAC) in the fishing industry. This institution limits the annual catch of a renewable resource (fish) in a geographic area. I research how to define the exploitation limits incorporating financial incentives to the problem, and if this institution can help to achieve a financially and ecologically sustainable harvest. Finally, the third legal institution studied in this thesis is the tax code, specifically, how the treatment of corporate losses, and the possibility of carrying them forward in time, ties in with the future equity risk and return of a firm. All institutions are described in detail and discussed empirically and theoretically. The results of my research show that they have a significant impact on the decisions of market agents and in the determination of asset prices. From the study of the personal bankruptcy code, I find that higher household protection at bankruptcy relates to a lower quantity of loans to households, and lower delinquency rates, indicating that riskier households are being priced out of the market, affecting their welfare. With respect to the TAC regulation, I find that for a representative fishery it is optimal to preserve a significant part of the resource for future harvesting, even in the presence of multiple sources of uncertainty. Finally, after evaluating the effect of Tax Loss Carry Forwards on the firms’ risk and returns, I find that its magnitude is highly significant in positively forecasting standard equity risk measures, that they significantly predict equity returns, even when accounting for standard measures of risk.

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