This dissertation is comprised of three essays.
The first essay, titled “CEO Social Status and Risk Taking,” studies the implications of relative concerns, or social comparisons, to risk taking of corporate officers. The corporate environment is a perfect setting to study such effects, as it seems plausible that high-ranking corporate officers value status to a significant extent. There is little work, however, on the interaction between social status concerns and managerial risk taking, which in turn affects almost all corporate policy, ranging from investment choices to capital structure. I argue that CEOs with higher reputation have an incentive to follow their peers and do what other firms are doing, in order to lock-in their relative advantage. I use prestigious business awards assigned by major media organizations (such as Business Week) to measure shocks to CEO status. I then study how different measures of managerial risk taking change after receiving an award. In line with the theoretical predictions of relative status concerns, I find that firms with award-winning CEOs monotonically decrease their idiosyncratic volatility ratios and their industry betas converge to 1. R&D expenditure decreases by 20% while investment in tangible assets increases relative to a matched sample of non-winning CEOs. Finally, I find that status may affect not merely observed risk taking but also underlying risk preferences, as implied by individual-level asset allocation. I interpret the results as evidence for the significance of social status concerns in managerial risk taking.
The second essay is joint work with Fernando Zapatero. In this paper, titled “Thou Shalt not Covet thy (Suburban) Neighbor's Car,” we study the effect of population density on the intensity of "keeping up with the Joneses" behavior. Using a unique dataset of car registrations from 2004 to 2006 in three counties of Southern California, we show that neighbor effects are stronger in areas with lower population density. The decision to buy a car is strongly influenced by previous car purchases of neighbors, and the effect is substantially stronger in areas with lower population density. Such areas represent small communities in which neighbors are likely to know each other, and can therefore manifest their income or wealth through the public display of their consumption. The evidence is consistent with two possible channels of influence: information and status concerns. We find evidence supporting both channels, as our results cannot be fully explained by information exchange, or word of mouth. We argue that the stronger effect that we find in areas with lower population density is driven by status signaling reasons.
The third essay is joint work with Christopher Jones. In this paper, titled “The Weekend Effect in Equity Option Returns,” we revive one of the earliest and most studied pieces of evidence against the Efficient Market Hypothesis—the weekend effect. During the weekend, financial markets are closed. For option writers, this means holding a position that exposes them to unbounded losses, while not being able to trade. We find that returns on options on individual equities display markedly lower returns over weekends (Friday close to Monday close) relative to any other day of the week. These patterns are observed both in unhedged and delta-hedged positions, indicating that the effect is not the result of a weekend effect in the underlying securities. We find even stronger weekend effects in implied volatilities, but only after an adjustment to quote implied volatilities in terms of trading days rather than calendar days. Our results hold for puts and calls over a wide range of maturities and strike prices, for both equally weighted portfolios and for portfolios weighted by the market value of open interest, and also for samples that include only the most liquid options in the market. We find no evidence of a weekly seasonal in bid-ask spreads, trading volume, or open interest that could drive the effect. We also find little evidence that weekend returns are driven by higher levels of risk over the weekend. The effect is particularly strong over expiration weekends, and it is also present to a lesser degree over mid-week holidays. Finally, the effect is stronger when the TED spread and market volatility are high, which we interpret as providing support for a limits to arbitrage explanation for the persistence of the effect. Our interpretation is that the low Monday returns are driven by option writers, who require compensation for holding open positions during the weekend. Our results are consistent with the conjecture that investors are generally averse to holding positions with unbounded losses when financial markets are closed.