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Economists, observers and policy-makers often emphasise the role of uncertainty and sentiment as a potential driver of the business cycle. I analyse the impact of uncertainty and sentiment measures on asset prices, corporate investment, and corporate capital structure decisions. In addition, I also investigate the role of blockowners play in firms investment and debt financing decisions when firms face uncertainties. Chapter One examines and compares the implications of the following six sources of uncertainty nd sentiment measures on asset prices. I use the news-based economic policy uncertainty (EPU) measure of Baker, Bloom, and Davis (2016) and the direct econometric estimates of time-varying macroeconomicuncertainty (JLNMacroU) and financial uncertainty (JLNFinU) of Jurado, Ludvigson, and Ng (2015) to capture uncertainties in the United States; and four different sources of sentiment measures, including, the leading index for the United States (USLI), University of Michigan consumer sentiment indices (MICC, MICS, and MICE) and their subgroups, American Association of Individual Investors (AAIISent) sentiment survey measure, and sentiment of Baker and Wurgler (2006) (BWSent) as proxies of United States investors sentiment. My estimations provide evidence that EPU, JLNMacroU, and JLNFinU have significant predictive power on market excess returns. The coefficients reveal that EPU positively forecasts log excess market returns, whereas JLNMacroU and JLNFinU load negative signs. Furthermore, using Fama–French 25 size–momentum portfolios as test assets, a variety of cross-sectional tests show that the factor-mimicking portfolios of uncertainty indices carry negative risk premiums. In contrast, risk premiums commanded by sentiment mimicking portfolios are positive. Comprehensively, I find EPU performs better than other sentiment and uncertainty measures in terms of its predictive ability and cross-sectional explanatory power, suggest that economically, EPU is a relatively more important factor among these six sources of uncertainty and sentiment measures.
Chapter Two studies how macroeconomic, firm-level, and higher-order uncertainty affects real corporate investment in firms with different active and passive block ownership levels. My ownership data are extracted from statutory SEC filings that blockholders are required to file and indicate their active or passive status. My main results are as follows. First, investment is more sensitive to firm-level uncertainty shocks compared to macroeconomic and higher-order uncertainty shocks. Second, one standard deviation change in all types of uncertainty shocks has a higher negative effect on investment rate for firms held by active blockholders than those held by passive blockholder. Higher-order uncertainty has the most negative impact, followed by macro-economic and firm-level uncertainty. Third, using a Bartik-style instrument for firm-level uncertainty, I find that my main results still hold. These results, taken together, show that blockholders stated their intentions to influence firms’ control in statutory filings provide means to indicate how firm investment reacts to future economic uncertainty. My results have implications for the current debate about the effects of ownership concentration in publicly listed firms’ decision-making.
Finally, in Chapter Three, I investigate the effects of Economic policy uncertainty and Block ownership on corporate leverage. Using the news-based economic policy uncertainty (EPU) measure of Baker, Bloom, and Davis (2016), I find that EPU is negatively associated with leverage ratios. Between long-term and short-term debt, firms tend to reduce their long-term debt more when firms face economic policy uncertainties. Furthermore, I find the negative effects of EPU on corporate leverage ratios are more pronounced for firms having a block or blocks of shares owned by active beneficial owners. For firms with a high level of total active blockholding, their leverage ratios are even more sensitive to EPU. Whereas, among firms that only have passive blockowners, the high level of total passive beneficial holding does not reveal big differences. Overall, my results suggest that EPU deteriorates the external financing environment, causing firms to cut their total leverage ratios by reducing their long-term and short-term debts. Between long-term and short-term debts, firms tend to lower their long-term debts relatively more when face uncertainties. Moreover, I find blockowners, especially active blockowners, tend to engage in firms’ debt financing decisions. The leverage ratios of firms with active block ownership are relatively more sensitive to EPU, and firms with a high level of active block ownership, have more negative loading of EPU on firms’ leverage ratios. |
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