Essays on Financial Economics

My dissertation has three chapters. In the first chapter, I show that property tax rates among single family homes in the United States are regressive with respect to sale price because tax assessors use flawed valuation models that ignore priced house and neighborhood characteristics. The insight from this chapter is that a wealth tax system that requires the government to value assets that do not have readily available market prices would tend to increase wealth inequality among asset owners. In the second chapter, I show that failure of bond insurance companies during the Global Financial Crisis constrained local municipalities’ ability to borrow from the municipal bond market and employ workers. Results from this chapter show why, during the financial crisis, local governments were unable to borrow and spend more to support local economies. In the last chapter, I show that social similarities such as school and ethnic ties between venture capital investors and startup founders increase the likelihood of collaboration and investment success. These results suggest that the type of social traits venture capital investors use to form business partnerships matters for investment outcomes

Net Income Measurement, Investor Inattention, and Firm Decisions

This paper studies the interaction between investor inattention and firms' capital allocation decisions by exploiting an accounting rule change that requires publicly traded firms to incorporate changes in unrealized gains and losses (UGL) from equity securities into net income. We build a model with risk-averse investors who can be attentive or inattentive and managers who choose how much to invest in financial assets. The model makes two main predictions. First, with inattentive investors, the rule change will cause firms' stock prices to react more strongly to changes in UGL. Second, we identify conditions under which the rule can lead to a higher stock price discount because of higher perceived residual uncertainty, and managers respond by cutting investment in financial assets. We use US insurance company data to test these predictions. We find that insurers' stock returns react more strongly to changes in UGL on equity securities after the rule change, and more so for firms with low analyst coverage. Using a difference-in-differences approach, we find that by 2020, public insurance companies cut investments in publicly traded stocks by almost 20%. Our results highlight the impact that investor inattention has on firms' stock prices and resource allocation decisions