Three Essays in Investments

Abstract

My dissertation comprises three essays delving into questions that contemporary investors encounter in the ever-evolving landscape of investments. The first essay examines how the presence of public pension funds as limited partners influences venture capitalists' (VCs) risk-taking behaviors. It notes that investments by public pension funds in the venture capital market have increased over the past two decades, and these funds possess unique objective functions compared to other venture capital investors. Findings suggest that VCs backed by public pensions tend to invest in startups with lower-risk profiles, such as those with technologies related to public companies, numerous patents, and later funding rounds, leading to more frequent and quicker exits but lower returns. To establish causality, I employ an instrumental variable evaluating the likelihood of public pension funding based on the location of funds initiated during a typical fundraising cycle in a venture capital firm. Furthermore, I find that public pensions prefer venture capital firms with a track record of conservatively managing funds, particularly those pensions that have previously engaged with such firms. The second essay shifts focus to the stock market, documenting higher returns from companies developing new technologies. The advancement of new technologies is pivotal to an economy’s potential, yet it carries inherent risks. As per investment theories, investors demand premiums for holding stocks associated with high uncertainty, prompting questions about whether they are adequately compensated for investing in companies undertaking highly uncertain projects. A novel application of a graph-neural network model identifies new technology patent publications annually, enabling the calculation of firms' exposure to new technologies. With the measure, I find that portfolios with high new-tech exposure outperform those with low exposure, driven by significant risk premiums. This sheds light on the positive correlation between idiosyncratic risk and stock returns, contributing to our understanding of the market's valuation of technological innovation. The third essay presents a systematic analysis of stock market valuations of Corporate Social Responsibility (CSR) initiatives. The study identifies public demand for CSR as a pivotal factor in enhancing the value of CSR activities. Analyzing market reactions to CSR activities via cumulative abnormal returns, the research finds overall neutral market responses. Nonetheless, it finds that heightened public concern for specific issues can sway market reactions positively. Also, when CSR initiatives employ strategies that extend beyond the capabilities of individuals, the market responses tend to be favorable. The paper further shows that firms strategically increase their CSR activities and choose implementation modes, aiming to enhance their value. To explain why market reactions are, on average, neutral, I further provide evidence suggesting reasons such as virtue signaling, a lack of understanding of the importance of profitability, and other executive motives. Together, these essays deepen our understanding of investments by exploring how financial market participants, corporate endeavors in technological advancements, and societal expectations for corporate social responsibility influence investor behavior and asset prices.