Essays in behavioral finance

Abstract

This dissertation consists of three independent research chapters in empirical finance.

In the first chapter, I investigate on the aging phenomenon in boardrooms. Independent director age has increased substantially over time, rising 8 percent from 2002 to 2014. Using 8-K filings of all U.S. listed firms from 1994 to 2014, I show that shareholders welcome amendments to corporate charters that increase mandatory retirement age of independent director. However, regressions of firm performance on director age in a sample of S&P 1500 firms show that the effect of independent director age on firm performance is non-uniform. To address potential endogeneity issues, I exploit director sudden death events and the results are consistent with the main sample. Additional tests show director age has costs and benefits. Mandatory retirement policies may preclude firms from retaining talented individuals.

The second chapter investigates the value of CEO succession planning. I use hand-collected data on CEO succession plans to explore the effects of CEO succession plans on firm performance. I find firms with succession plans have lower volatility around CEO turnover events, are able to appoint successors in a timelier manner with unexpected CEO departures, and have better performance following CEO turnover events. To isolate the effects of CEO succession planning, I use CEO death events as a natural experiment to randomly force firms to reveal their succession plans and to address the endogeneity problems. Overall, these results provide direct evidence that CEO succession planning is an important part of a board’s monitoring function. In the third chapter, I document the impact of unrelated investor attention and sentiment on stock performance. To do so, I break a company's name into constituent words (name-terms) and compute the weekly unexpected Internet search volume for name-term news that is unrelated to the company. Using the resulting measure, I find that an increase in unexpected name-term attention increases both return volatility and trading in linked securities. Furthermore, consistent with prospect theory, stock returns are significantly low when name-term sentiment is negative but are not affected by positive name-term sentiment. I provide suggestive evidence that institutional investors trade stocks to take advantage of the prevailing sentiment trends. My results are in line with limited attention theory and sentiment theory.