Essays on financial markets : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Finance, School of Economics and Finance, Massey University

Abstract

This thesis comprises three essays advancing the literature on financial markets, which play an important role in the economy by facilitating smooth and efficient capital allocation. In particular, the first essay focuses on the relationship between corporate culture and stock liquidity, while the second and third essays examine how changes in the fiduciary duty of loyalty affect stock price crash risk and the implied cost of equity. The first essay investigates the effects of corporate culture, functioning as an internal governance mechanism, on stock liquidity. The essay finds that firms with stronger cultural values are associated with higher stock liquidity due to reduced information risk, enhanced trust, and greater investor recognition. Corporate culture can also enhance stock price informativeness and future stock returns, decrease the level of default risk, and informed trading. These initiatives contribute to strengthening the firm’s value and shareholders’ wealth. The second essay examines how changes in fiduciary duty of loyalty, a fundamental aspect of governance mechanism, affect stock price crash risk. The essay finds that the enactment of the corporate opportunity waiver (COW) law constitutes an exogenous shock that weakens the fiduciary duty of loyalty, increases stock price crash risk by increasing financial reporting opacity, and decreases external monitoring. The third essay explores the effect of the change in fiduciary duty of loyalty on the implied cost of equity, measuring investor-required returns under risks. The essay shows that the cost of equity capital increases following the reduction in fiduciary duty of loyalty resulting from the enactment of the corporate opportunity waiver law. The evidence in the second and third essays highlights the potential unintended consequences of relaxing the duty of loyalty and underscores the need for effective governance mechanisms. Overall, this thesis provides contributions to existing literature on governance mechanisms and financial markets. The thesis highlights how both internal governance mechanisms (corporate culture) and external governance mechanisms (legal framework) influence financial market outcomes, including stock liquidity, stock price crash risk, and investors’ required rate of returns. Findings from this thesis offer valuable insights for investors, corporate managers, financial professionals, regulators, and other financial market participants.