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Michael S. Long

Dissertations Supervised:

Name: Xiaoli Wang
Graduation Date: 2006/May
Proposal Title: Are Entrepreneurs Different in terms of Financial Risk Perception and Investment Allocation? –  A Theoretical and Empirical Discussion

Name: Zhang, Jingfeng
Graduation Date: 2004/May
Thesis Title: An Empirical Test for the Theoretical Basis of the Size Factor in the Fama-French Three-Factor Framework.

Name: Lai, Zhi-Hong
Graduation Date: 2001/May
Thesis Title: The Prepayment of Home Equity Loans: An Empirical Study Based on Loan-Level Data

Name: Agarwal, Naman
Graduation Date: 1997/January
Thesis Title: Equity Carve-Outs: An Empirical Analysis

Name: Kang, SungJune
Graduation Date: 1996/May
Thesis Title: Determinants of the Leasing Decision: Theory and Empirical Evidence.

Name: Longo, John
Graduation Date: 1995/October
Thesis Title: Selecting Superior Securities: Using Discriminant Analysis and Neural Networks to Differentiate Between 'Winner' and 'Loser' Stocks

Name: Rosenblatt, Eric
Graduation Date: 1994/October
Thesis Title: Three Interrelated Papers on the Subject of Residential Mortgages

Name: Lee,Wonil
Graduation Date: 1993/October
Thesis Title: Cross-Sectional Determinants of Convertible Debt Issues of the U.S. and Japanese Firms

Dissertation Proposals of Current PhD Students:

Name: Jingfeng Zhang
Proposal Defended: 2004/April
Proposal Title: An Empirical Test for the Theoretical Basis of the Size Factor in the Fama-French Three-Factor Framework

Dissertation Proposal Abstract: The Fama-French (1992, 1993) three-factor (namely, factor loadings on the market, Small-Minus-Big and High-Minus-Low portfolios) model provides a succinct description of cross-sectional variations in stock returns. To date, the Fama-French three-factor model not only has been widely accepted in journal-quality empirical asset pricing research, but also has been incorporated into introductory finance textbooks (For example, Brigham and Ehrhardt, 2001). However, lacking any rigorous theoretical foundation, the Fama-French three-factor “model” is essentially driven by empirical regularities. To justify the pricing of size in multi-factor asset pricing, this dissertation focuses on the size factor within the Fama-French framework, considers the existing theoretical hypotheses related to the size and Book-to-Market effects in the literature, and then empirically tests which hypothesis best fits the underlying data generating process.  

The size factor (or effect) in this dissertation is used in both the factor loading and firm characteristics contexts. Assuming rational asset pricing, I focus on testing the default risk factor hypothesis versus the illiquidity/information costs story as the competing explanations for the size factor. The former is proposed by, to name a few, Chen and Chan (1991), Chen, Roll and Ross (1986), and Fama and French (1993, 1995); while the latter is modeled in Amihud and Mendelson (1986), Merton (1987), Easley, Hvidkjaer and O’Hara (2001), and O’Hara (2003). In my empirical study, empirical variables proxying for these two competing hypotheses are constructed using market and accounting data retrieved from CRSP and COMPUSTAT databases respectively. Then, using both the Fama-MacBeth time series and panel data approaches, I conduct three sets of empirical regression analyses at both industry and overall market level for the period of 1980-1999.

In summary, my results offer supporting evidence for both the default risk factor hypothesis and the illiquidity/information story when they are evaluated alone, but favor the default risk theory when they are examined side by side. Further, among the default risk factors, market-based default risk factors, such as an option-based bankruptcy probability measure and the semi-deviation in returns, are found to provide relatively more information than accounting-based default risk factors such as Altman’s (1968) Z-score and Ohlson’s (1980) O-score. Finally, my results do not seem to be driven by the survivorship bias or other econometric issues. They are also robust to model selection tests such as log likelihood ratio tests and the Vuong (1989) test.

Name: Xiaoli Wang
Proposal Defended: 2004/December
Proposal Title: Are Entrepreneurs Different in terms of Financial Risk Perception and Investment Allocation? –  A Theoretical and Empirical Discussion

Dissertation Proposal Abstract: Entrepreneurs appear as a group to act irrationally in terms of their risk-return trade-off. Consistent evidence is observed where they undertake greater risks than their returns would justify. Various explanations have been proposed to tackle the puzzle, such as high entrepreneur risk tolerance, over optimism and misperceived risk, large additional pecuniary benefits and non pecuniary, a preference for skewness etc… However, none of these can successfully explain the puzzle or they are more or less in conflict with the later empirical research.

In this dissertation, I initiate a new theory to explain the entrepreneur risk-return puzzle by combining the traditional perspectives and behavioral views of investment decisions. The new theory is consistent with both the risk undertaken and the average low realized returns of entrepreneurs. In my framework, I argue that entrepreneurs or people investing in these closely held businesses are not necessarily acting irrationally. Rather, these individuals perceive risk differently than posited in traditional risk-return models. I also propose that these people usually place a higher value or belief on personally held information or assets under personal control as compared to general public information and these beliefs lead them to assess lower risk regarding such assets. Correspondingly, they require lower returns as compensation and they tilt their investments toward such assets where they have private information advantage or control preference.

The risk perception study is also extended into a heterogeneous CAPM model in which investors hold variant risk assessment and thereafter heterogeneous portfolios.  The theory also offer rationales to other unexplained phenomena such as investors’ home bias or local bias, investors’ under-diversification, etc.

Empirical tests based on the survey methodology and comparative analysis are also performed.