Three essays in behavioral finance

AbstractTHREE ESSAYS IN BEHAVIORAL FINANCEByByoung-Hyoun HwangWhile not devoid of sentiment, self-interested rational decisionmakers in traditional economic models are assumed to be immune toits influence. The purpose of this dissertation is to explorewhether financial markets can be better understood when relaxingthis important (but questionable) assumption and allowing subjectsto be influenced by sentiment. In the first essay ("It pays to havefriends," co-authored with Seoyoung Kim), we examine whetheractions of corporate directors with social ties to CEOs aredetermined by communal norms, which promote mutual caring andtrust, as opposed to pure self-interested exchange-based norms.Consistent with our conjecture, the results suggest that boardswith more social ties to the CEO award compensation packages thatare both higher in level and less sensitive to performance; boardswith social ties are also less likely to fire the CEO. In thesecond essay ("Country-specific sentiment and security prices"), Iadd to the growing body of evidence suggesting that sentiment,while irrelevant to the decision at hand, has an importantinfluence on decision making and market outcomes. Specifically, myfindings imply that sentiment towards certain countries affectsdemand for financial securities from these countries and causessecurity prices to deviate from their fundamental values. In thethird essay ("Distinguishing behavioral models of momentum"), Itest the implications of two of the most prominent, recentlyproposed, sentiment-based models. I provide evidence consistentwith one, but inconsistent with the other.