My dissertation consists of three chapters on trading around announcements and resolution of uncertainty. A merger failure announcement is made when either or both of the acquiring firm and the target firm decide to terminate a merger agreement. In the first chapter, I hypothesize that insider sales prior to the merger failure announcement create severe agency conflicts allowing insiders to take advantage of other shareholders. I analyze the stock performance of target firms during the post-merger failure period and find out that it is negatively correlated with insider sales transactions of the target firm in the period prior to the announcement of merger failure. In addition, the firms that restrict insider sales prior to merger failure announcement have a better chance to get acquired by other firms in future merger offers than those that do not restrict insider sales. In my second chapter, I empirically investigate two related questions on business R&D. First, does R&D create or resolve uncertainty? Second, does uncertainty encourage or discourage business R&D? My testing is consistent with the hypothesis that R&D creates rather than resolves uncertainty. Why then do risk averse business managers undertake R&D? I argue that in creating uncertainty, R&D also creates “shadow options” for supplementary business investment not envisaged by business managers in the original objective for R&D. Rather, managers unexpectedly uncover shadow options in R&D’s inherent knowledge discovery process, which encourages business R&D in the first instance. Consistent with this real options interpretation, I report evidence that volatility encourages R&D. On average, firms experience positive abnormal returns around earnings announcement dates. In my third chapter, I hypothesize that portfolios holding stocks for two days around each of the quarterly earnings announcements and risk-free assets for the rest of the year are able to significantly reduce risk while still capture a considerable portion of the annual returns relative to those of portfolios holding stocks for the entire year. My empirical results are mostly consistent with the above hypothesis.
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Thesis advisor: Rubin, Amir
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