Essays on Behavioral Finance

Essays on Behavioral Finance

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This dissertation analyzes the behavior of individual investors and households. In the first chapter, I study how an entrepreneur's endowment portfolio affects the proportion of his personal wealth held in the equity of his firm. Two types of entrepreneurs are studied. Endowed entrepreneurs gained ownership of their firms through inheritance or gifting. Non-endowed entrepreneurs either founded or purchased their firms. I find that, controlling for firm and entrepreneur characteristics, endowed entrepreneurs hold approximately 5% more of their personal wealth in the private equity of their firms than do non-endowed entrepreneurs. This difference in private equity holdings is highly persistent over time. Endowed entrepreneurs do not actively seek to reduce the amounts of private equity in their portfolios by withholding new equity injections, applying for new bank loans, or limiting physical investments in their firms. Endowed entrepreneurs do not take on more debt than non-endowed entrepreneurs. Instead, they finance the large investments in their firms through investing less in other types of assets, such as real estates. I explore possible explanations for the observed difference in private equity holdings between endowed and non-endowed entrepreneurs, including agency theory, difference in degrees of risk aversion, transaction costs, family ownership, status quo bias, and differences in overconfidence about their own managerial skills. Our results suggest that the status quo bias explanation is the most consistent with the data. In the second chapter, we study the 'competence effect'. People are more willing to bet on their own judgments when they feel skillful or knowledgeable (Heath and Tversky, 1991). We investigate whether this 'competence effect' influences trading frequency and home bias. We find that investors who feel competent trade more often and have more internationally diversified portfolios. We also find that male investors, and investors with larger portfolios or more education, are more likely to perceive themselves as competent than are female investors, and investors with smaller portfolios or less education. Our paper also contributes to understanding the theoretical link between overconfidence and trading frequency. Existing theories on trading frequency have focused on one aspect of overconfidence, i.e., miscalibration. Our paper offers a potential mechanism for the 'better-than-average' aspect of overconfidence to influence trading frequency. In other words, overconfident investors tend to perceive themselves to be more competent, and thus are more willing to act on their beliefs, leading to higher trading frequency.endowed and 3040 are non-endowed. The SSBF sample consists of 2571 observations, with 161 endowed and 2410 non-endowed entrepreneurs. Table 1 . 1 summarizes the characteristics of the entrepreneurs and their firms. For the SCFanbsp;...

Title:Essays on Behavioral Finance
Author:Hai Huang
Publisher:ProQuest - 2006


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