Essays in finance

Abstract

This dissertation consists of three essays on information discovery in the financial market. In the first chapter, we investigate why banks do not lend to small businesses. We propose that the organizational complexity within a bank increases the cost of communicating information. Using the introduction of new airline routines that reduce the travel time between banks’ headquarters and banks’ branch-counties, we document banks making substantially more frequent but smaller loans to local small businesses. Nevertheless, the total amount of small business loans does not change, implying that banks’ headquarters are not reallocating the internal capital resources even though the information channel is established. Therefore, we infer that the headquarters delegate the branches to make their own small business loans decision based on soft information. We find that the delegation is stronger in counties with intense competition, remote from the headquarters, and have high information opacity. We do not find evidence of delegation for medium to large-sized business loans. The communication of soft information within banks’ organizational structure will enable branches to give more small business lending to boost the local economy.

In the second chapter, we examine the consequence of mandatory ESG disclosure in the global supply chain in 116 countries. Using the mandatory ESG disclosure policies adopted by 29 countries between 2003 and 2021, we find that enhanced ESG reporting incentivizes firms to engage in ESG outsourcing activities by selecting suppliers from countries regions with less environmental concerns and with high information opacity. Several extensions suggest that customers’ ESG profile improved after the stringent ESG disclosure requirement at the cost of suppliers, indicating that customers shift ESG risks to suppliers through off-balance-sheet economic activities. These findings shield light on the unintended outcome of mandatory ESG disclosure policies.

In the third essay, I construct a proxy for regional economic intensity using electricity usage within electricity service territories in the United States from 1990 to 2020. I find that the growth rate in electricity usage is a leading indicator of the local GDP change and local employment rate in a statistically significant manner. I further test the return predictability of this regional economic measure by forecasting the U.S. publicly listed firms’ earnings change and the subsequent earnings announcement returns. After aggregating the electricity usage growth rate of each establishment located in different electricity service areas of a listed firm, I show that higher electricity usage growth leads to higher EPS and thus positive announcement returns. The findings suggest that the growth rate of electricity usage carries additional information that has not been incorporated into the price and it can be incorporated into the trading strategies to generate alpha in the capital market.