Information, Asset Pricing, and Corporate Governance

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The purpose of this research is to investigate three related topics in the area of financial economics. The first topic will explore the impact of hedging strategies, such as programed trading, on the volatility of the stock market. In recent years, the stock market has become much more volatile. This fact was dramatized by the October 19, 1987 crash, and there remains great debate about what may be causing this increased volatility. The author will develop a theoretical model of stock market equilibrium in the presence of dynamic hedging strategies and asymmetric information in order to investigate this volatility. The second topic involves developing a theoretical model of asset pricing in the presence of transactions costs and durable consumption goods. The third topic will focus on developing a model of the control and governance of the corporation by introducing life cycle considerations. Much of the current literature assumes that shareholders own the corporation and the role of corporate governance is to develop a mechanism to maximize the value of stockholder wealth. However, from a corporate life cycle perspective, the entrepreneur who sets up a corporation may desire to choose a governance structure which gives him greater control at the expense of shareholder wealth. This work will increase our understanding of the allocation of voting rights and control in corporate arrangements. This project can be expected to make several important contributions. The work on stock market volatility should provide a better understanding of what is causing increased instability in financial markets. This in turn may suggest strategies for modifying market rules to bring about more orderly capital markets. The work on corporate governance should produce useful insights into merger and takeover behavior. The introduction of life cycle considerations may explain the reluctance of entrepreneurs to release control at early stages of the corporation. At an earlier stage, corporations may be much less vulnerable to hostile takeovers than is commonly thought.