Date of Graduation

8-2019

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Finance

Advisor/Mentor

Liu, Pu

Committee Member

Lee, Wayne Y.

Second Committee Member

Rennie, Craig G.

Third Committee Member

Xie, Kangzhen

Keywords

Bank Deregulation; Commodity Derivatives; Credit Default Swap; Interstate Risk Sharing

Abstract

My dissertation consists of two topics: the relation between derivatives and corporate finance, and the relation between bank deregulation and interstate risk sharing.

In the first essay, I study the use of commodity derivatives among U.S. oil and gas producers. Using hand-collected data, I find large variations in hedging intensity and hedging profits. On average, firms generate significantly positive profits, and their profits relate positively to the intensity of hedging. I further decompose the hedge ratio into two components: the pure hedging component and the market timing component. I find that the hedging profits relate strongly and positively to the market timing component. I also identify a group of firms that can consistently generate profits from their hedging activities. Among firms who actively change their hedging positions, the winners tend to be the larger firms. The hedging outcome does not increase equity beta while the pure hedging component tends to decrease equity beta. The positive profits are exclusive for the commodity derivative transactions of the oil and gas producers, while they do not profit from their interest rate or foreign exchange derivative transactions.

In the second essay, I look at the relation between the trading of CDS contracts and corporate’s risk-taking behavior. Because the CDS hinders successful debt renegotiation with creditors and weakens shareholders’ put option to strategically default, equity values of CDS firms are more sensitive to cash flow risk. As a result, I show that the onset of CDS trading is accompanied by a rise in equity market beta and return volatility, particularly for firms with poor credit ratings, high liquidation costs, and a more liquid CDS market. In the years after CDS trading is initiated, I find that firms reduce corporate risk-taking by expanding diversification across industries, scaling back risky investment, and reducing demand for leverage.

The final essay studies the impact of two types of banking deregulation, interstate banking deregulation, and interstate branching deregulation, on interstate risk sharing. We consider both the initial permission of interstate banking and interstate branching, and the follow-up changes in state-level restrictions. From the residential perspective, interstate risk sharing has two components: personal income smoothing and personal consumption smoothing. Our results provide evidence that interstate banking deregulation plays an important role in improving personal income smoothing, while it slightly hinders personal consumption smoothing. On the contrary, interstate branching deregulation does not have a significant impact on personal income smoothing, but does improve personal consumption smoothing.

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