Date of Award


Degree Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration


Peter Koveos


Corporate Finance, Institutional Investor

Subject Categories

Business | Finance and Financial Management


This dissertation consists of two major parts. Essay I examines the relationship between the firm’s derivative risk management and its financial constraint. Firms face a wedge between their internal and external financing for their investments. I test whether this wedge reduces the firm’s financial constraint when it hedges using interest rate, foreign currency, and commodity derivatives. Using a difference-in-difference framework around the implementation of Financial Accounting Standard (FAS) 123R, this study shows a strong causal relationship between hedging intensity and the financial constraint. I find that net debt increases for the derivative hedging firms, on the other hand, cash holding and net equity issuance decreases. When managers of non-financial corporations believe that their firm will face a liquidity shortage in the future, they save more cash out of cash flow as a precautionary measure. Both cash flow-cash sensitivity and investment-cash flow sensitivity decrease. As a result of this decrease, undrawn bank lines of credit and total lines of credit increase. The analysis also shows that both the loan spread and the probability of covenant violation decrease after firms start derivative hedging. The main implication of the analysis is that the risk management influences the asymmetric information between lenders and borrowers: increase in risk management intensity, the less the asymmetry.

In Essay II , I propose a novel instrument %∆EPCMPNIO, defined as the percentage change in the equities plus respective net options (the number of call options holding minus the number of put options holding) ownership by institutions. %∆EPCMPNIO predicts Earnings Announcements Abnormal Returns (EAR) and Standardized Unexpected Earnings (SUE) over the next quarter. This evidence suggests that institutional investors possess private information about individual securities. Moreover, this instrument shows a relation with many intuitive determinants, such as future stock returns and momentum. In all the cross-sectional return predictability regressions, %∆EPCMPNIO dominates the change in institutional investors’ equities ownership (∆EIO). In addition, this instrument subsumes all the option-based institutions’ measures used in Lowry, Rossi, and Zhu (2019). Furthermore, I find strong evidence of a cross-sectional relationship between my measure and Generalized Probability of Informed Trading (GPIN). Additional tests reveal that the positive relation between %∆EPCMPNIO and mean analyst forecast in the month prior to the fiscal quarter reflects that sophisticated investors have better knowledge about the factors related to forecast accuracy.


Open Access