Three Essays on Stock Markets

Abstract

The first chapter of my Ph.D. thesis, titled “The Value Relevance of Corporate Tax Expenses in the Presence of Partisanship: International Evidence”, contributes to the existing literature on the information contents of corporate taxes by investigating whether the political orientation of tax decision-makers affects the informativeness of corporate tax expenses. We confirm that firms bear higher tax expenses under left-leaning governments supporting the partisan theory of political cycles even in the wake of globalization. Furthermore, we introduce a simple model suggesting that the information contents of corporate tax expenses are conditional on the political orientation of the government, driven by investors’ perspectives on a firm’s future cash flows and cash-flow volatility. By analyzing cross-sectional country-level partisanship differences, we find that corporate tax expenses are only informative about future returns under right-leaning governments. This suggests that corporate tax expenses are arguably a more direct profitability indicator when right-leaning governments are in power. The second chapter, titled “The Direct and Indirect Impact of Non-cognitive Skills on Stock Market Participation” focuses on the Household Finance area. Using data from the Understanding America Study (UAS) survey panel, we explore the roles of cognitive and non-cognitive skills in the empirically observed stock market participation (SMP) puzzle. Specifically, we examine both the direct and indirect effects of the “primitive” factors of intelligence and non-cognitive skills (derived from conscientiousness and emotional stability scores) on stock holdings. This examination extends to their influence through well-observed proximate factors of SMP such as general and task-specific financial literacy, education, income, and trust. We find that non-cognitive skills have both direct and indirect, via the proximate factors, positive impacts on stock market participation. In contrast, intelligence solely affects participation indirectly through proximate factors. Overall, higher levels of intelligence and non-cognitive skills significantly enhance the likelihood of owning stock equities. The third chapter, titled “Market Literacy and Stock Market Participation”, delves deeper into the determinants of SMP and investigates the role of specific stock market knowledge in household stock-holding decisions using the UAS, survey panel. I examine whether a demonstration of knowledge about a reasonable distribution for market return increases equity participation. I demonstrate that possessing market return expectations that are in line with historical performance and the current environment, labeled as market literacy in return, enhances the likelihood of stock holding and this effect persists even after accounting for established factors such as general and task-specific financial knowledge, intelligence, and education. Moreover, overoptimistic households, whose market return expectation is greater than the market literacy range, are less likely to participate since the higher expected outcome is dominated by the perceived literacy cost. I also explore the impact of market literacy in risk and overprecision on SMP. Market literacy in risk refers to providing reasonable volatility estimates for stock returns, while overprecision signifies overestimating market outcomes volatility. The findings suggest that the roles of market literacy in risk and overprecision on equity holding decisions are indirect and fully subsumed by other drivers of SMP.