Essays on CEO Compensation and Information Asymmetry in Equity Markets

Abstract

In the first study, the scholarly literature finds that informed traders prefer to transact in the options market, presumably because of the increased leverage found in that market. We define a new measure of asset interest that combines the monetary size of changes in option open interest or volume with the probability of options expiring out-of-the-money (OTM). We sort portfolios into deciles based on the asset's call option interest measure divided by the aggregate call and put measure. The information measure has predictive value. Long-short zero-cost portfolios have raw returns exceeding 100 percent and excess returns both relative to reference portfolios and Fama- French factors. Most of the return is due to the short side of the positions. In the second essay, this paper elucidates the opposite views in risk management from bondholders and shareholders after a negative shock. I use the 8-hour Ozone standard under the U.S. Clean Air Act as an exogenous identification to show that bondholders seek to control the risk by requiring higher cash balances, while shareholders grant more risk-taking incentives to CEOs when the firms are treated to more stringent regulations. The effects on cash balance are stronger, while the effects on risk-taking incentives become weaker in the firms with higher leverage. Overall, a negative shock will elevate the risk-control demands from bondholders, while increasing risk-taking Incentives to counter the risk aversion of CEOs. In the last essay, we investigated the effect of the Russian invasion of Ukraine on Black Sea Wheat futures. We find that the Black Sea Wheat futures are cointegrated with the Kansas City Wheat futures, the global standard for wheat prices. However, the relationship between these two series significantly changes as a reaction to the main geopolitical events in the region. We also document a significant drop in open interest after the invasion. Our results are relevant to many market participants, such as Ukrainian farmers and consumers in developing countries, including the World Food Program, which buys about forty percent of its wheat supplies from Ukraine.