UCLA

My dissertation studies the role information plays in various financial and economic settings. My first chapter investigates how stock price corresponds to public information in after-hours trading. Almost all U.S. firms now announce earnings outside of regular trading hours. This paper studies how stock prices incorporate information in after-hours trading. I find slow prices adjustment accompanied by significant trading volume. During 2002-2012, 5,881 rule-based trading opportunities generate an average return of 1.53% within four hours. After costs (assessed by a trading experiment), an investor who properly exploits the slow adjustment beats the market by 11.5% per year. Analyzing the use of intermarket sweep order (ISO), a new order type launched under Regulation National Market System (Reg NMS), I link the slow price adjustment to investor trading behavior.

My second chapter investigates how firms endogenously arise out of a market

economy in the presence of dispersed private information. It is well known that in a rational expectation equilibrium market price could empower individuals with their collective wisdom by coordinating actions guided by dispersed private information. I show that simple profit-sharing contracts replicates such coordination effect. Whenever rational expectation is imperfect due to noise or the lack of a liquid market, individuals always have incentives to create a partnership among themselves. Optimal profit-sharing within such a partnership replicates the effect of direct communication but without actually incurring communication. This insight sheds new light on the nature of the firm: firms endogenously emerge as an institutional innovation to complete the market under dispersed private information. I discuss several implications of this new perspective on general corporate finance topics.

My third chapter studies optimal crowdfunding security design to harness investors’ collective wisdom. The notion that a population’s collective wisdom dominates even the most accurate judgment from any individuals within the group, or wisdom of the crowd, has been widely cited in recent years to advocate for security-based equity crowdfunding. In the context of project financing from a large pool of prospective investors, I show that simple profit-sharing contracts that are similar to but slightly different from typical common stocks could empower individuals with their collective wisdom by coordinating actions guided by dispersed private information. Although such profit-sharing contracts are yet to gain popularity for capital investment, they have been underlying the compensation structures of many human-capital intensive partnership firms. The results provide guidance on security design for the emerging crowdfunding practice.