Essays in empirical finance

This dissertation consists of three independent papers. The first paper investigates the role of incomplete investor information in financial innovations. We analyze the information that structured product issuers provide to the investors and find that issuers have an information advantage over investors regarding two important valuation parameters: volatility and dividends. This advantage allows issuers to push overpriced securities to investors and induces them to design products with large information frictions. The insights are of systemic importance because they suggest that product issuers' behavior increases information frictions in the financial system. The second paper examines the role of obfuscation in the market for structured products. By exploiting the staggered adoption of a price disclosure policy, I show that issuers subject to price disclosure significantly increase the complexity of their products. Further, I provide evidence that complexity significantly reduces the price elasticity of demand, thus raising the concern that complexity induces social welfare costs. The third paper proposes an explanation for the empirically documented relation between the value factor and the investment factor of the Fama-French five-factor model: Investors observing that a firm decreases its investment perceive the firm as riskier, and therefore adjust their valuations of the firm downwards. Consequently, the firm's book-to-market ratio increases. In support of this conjecture, we find considerable overlap between the factor-mimicking portfolios of the value and the investment factor. We show that this overlap is driven by stocks that experience an increase in their book-to-market ratios due to a decrease in their market values. Moreover, our results show that these value stocks behave like low investment stocks and thus earn a premium. Together with actual low investment stocks, these stocks are primarily responsible for the value premium.