Three essays on the effects of externalities in finance




McTier, Brian Carson

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I examine the effects of three externalities in finance: law, health, and behavior. First, I consider the impact of securities class action lawsuits on firms' investment and financing choices. I find that lawsuits appear to have more than just deterrent or redistributive effects; on average these lawsuits appear to change firm behavior towards better governance, greater focus, and lower overinvestment. Next, I consider the impact of influenza on stock market trading. Increasing flu incidence in the greater New York area is associated with lower stock trading activity, widening bid-ask spreads, and reduced volatility; increasing flu incidence in the U.S. as a whole is associated with widening bid-ask spreads and lower stock returns. The impact of New York flu is consistent with fewer traders and reduced information production as institutional investors and market makers are absent; the impact of overall U.S. flu is consistent with reduced liquidity and decreased expectations about real economic activity. Last, I consider the impact of correlated investor sentiment on the tracking errors (unexplained returns) of exchange traded funds (ETFs). The unexplained returns on ETFs pre-ranked as more likely to be impacted by sentiment are correlated with each other, correlated with extant measures of investor sentiment, and correlated with the returns on portfolios constructed to have high concentrations of individual investors. Overall, the findings in this dissertation suggest that law, health, and behavior externalities are informative and considering the effects of these externalities may be appropriate in certain financial models.


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Agency, ETF, Governance, Influenza, Security Class Action Lawsuits, Sentiment