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Essays in empirical finance : from venture capital to the S&P 500 Finucane, Daniel Sean

Abstract

Stocks often increase in value when they are added to the S&P 500 and lose value when they are dropped from the index. There are several hypotheses advanced for this effect. The information hypothesis is that when a firm is added this reveals positive information about the firm. This information effect would explain stock price movements associated with additions and deletions. I examine several stocks that were dropped from the S&P 500 purely because they were foreign stocks. Accordingly, there should be no negative implication regarding these stocks and the information effect should be absent. The foreign firms behave differently from the normal deletions in all time periods. Further evidence of the information effect is found when those firms which are transferred to another S&P index significantly outperform those which are deleted from S&P indices entirely. This study does, therefore, provide support for the information hypothesis. I next look at one of the recent theories of deviation from diversification in the allocation of assets - "familiarity". I look at the specific case of the decision by defined benefit trustees to allocate assets to venture capital. One might expect that the pension funds of companies in highly venture capital industries and near venture capital clusters would be more likely to invest in venture capital, despite the high correlation with human capital and real estate. I find that pension funds do not seem to base the decision on whether or not to invest in venture capital on familiarity, as measured by industry and geography. American corporations that sponsor pensions may have defined benefit pension plans, defined contribution (DC) plans, or both, and have been shifting toward DC plans over the past 25 years. We investigate the effect of cross-firm and time-series variation in the DC share of pension assets on corporate financial performance. Using several return measures, including return on assets, operating return on assets, and return on equity, we find that larger DC shares tend to give rise to higher returns. We interpret these results as arising in part from more efficient worker retirement and mobility decisions under DC plans.

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