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Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2022; Aachen : RWTH Aachen University 1 Online-Ressource (2022). doi:10.18154/RWTH-2022-11118 = Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2022, This thesis examines various effects of equity rights issues and corporate buybacks in an international context, focussing especially on signalling. Due to existing information asymmetries between the better-informed management and the less-informed shareholders, each financing decision can be understood as a signal for the true value of the firm, which is only known to the management. Both the announcement of a rights issue and a share buyback send a corresponding signal to the market. While buybacks typically indicate some undervaluation, rights issues are more likely to occur when shares are overvalued. Therefore, the announcement of a rights issue is typically associated with negative announcement effects, whereas the announcement of a buyback has a positive effect on the share price. Furthermore, in the case of a rights issue, the (true) firm value cannot be inferred on the basis of the announcement alone. Investors can also infer the quality of the firm and thus its value on the basis of various parameters of a rights issue. The discount of an issue, which is the difference between the subscription price and the current share price before the announcement in relation to the current share price, plays an important role. firms of higher quality can generally choose lower discounts (and thus higher subscription prices), while firms of lower quality are more likely, ceteris paribus, to opt for higher discounts. Furthermore, the renounceability of the subscription right is also relevant. Firms can issue either renounceable (i.e., tradeable) or non-renounceable (i.e., non-tradeable) subscription rights. While shareholders, who do not wish to subscribe new shares, can simply sell their right to other shareholders or external investors in a rights issue with renounceable subscription rights, this is not possible with non-renounceable rights. In this case, shareholders can either redeem their (valuable) right and subscribe the issue or allow it to expire. These parameters are examined in detail in three research papers in this thesis, while the fourth research paper analyses the timing of buybacks in connection with a firm's stakeholder orientation. Thus, this thesis is divided into four individual research papers. The first research paper, "Determinants of discounts in equity rights issues: An international comparison" examines the composition of the discount in a rights issue. In an international comparison, the paper shows that firms of higher quality choose lower discounts, while firms with a high volatility of the share price choose higher discounts. Furthermore, it also shows that firms in countries with higher uncertainty avoidance also choose lower discounts. This effect is particularly pronounced in countries with lower investor protection. The second research paper, "Discount, transparency and announcement effects of equity rights offerings: international evidence," analyses the impact of discounts on announcement effects in different institutional settings. High-quality firms will opt for lower discounts, which leads to higher announcement effects in a rights offering, ceteris paribus. However, the signaling character of the discount may depend on the given market environments. Using an international dataset, this study shows that the discount is particularly important as a signaling instrument in environments with a high information asymmetry between the market and management. The third research paper, "Renounceability of equity rights offerings - an international approach," examines the renounceability of the subscription right in more detail. The results show that firms of higher quality tend to issue non-renounceable subscription rights, while firms of lower quality use renounceable rights. The announcement of a rights issue with non-renounceable rights thus signals high firm quality. Furthermore, this relationship between firm quality and the decision for non-renounceable subscription rights is particularly pronounced in environments with a focus on the interests of shareholders. The fourth research paper of this thesis, "Share repurchases, undervaluation, and stakeholder orientation" addresses the timing of share repurchases in relation to the stakeholder orientation of the firm. Share repurchases are mostly carried out in periods of higher undervaluation, as the repurchase of undervalued shares represents a project with a positive net present value for the firm and the ongoing shareholders. However, such a buyback of undervalued shares results in a wealth transfer between the selling shareholders, who sold undervalued shares, and the ongoing shareholders, who benefit from the purchase. Higher undervaluation leads to larger wealth transfers. As, according to the assumptions of the study, the selling shareholders constitute stakeholders of the firms, firms with a higher stakeholder orientation should try to minimize the wealth transfer by repurchasing during periods of lower undervaluation. The results of this research paper confirm this hypothesis. The study shows that firms with a high stakeholder orientation - measured via the CSR score - announce buybacks in periods of lower undervaluation. This shows that market participants can use a firm's (observable) stakeholder orientation to infer whether buybacks are motivated by current undervaluation or by other factors. Shareholders can hence draw conclusions about the (true) value of the firm. This thesis thus highlights the importance of international aspects in the context of rights issues and buybacks. Especially in rights issues, different country-specific characteristics play a major role. The results also show that a firm's stakeholder orientation is a key factor in the timing of buybacks. While firms with a high stakeholder orientation tend to announce their buybacks in periods of lower undervaluation, firms with a low stakeholder orientation buy back shares in periods of higher undervaluation., Published by RWTH Aachen University, Aachen

Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2020; Aachen 1 Online-Ressource (279 Seiten) (2020). = Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2020, This paper investigates whether managerial rhetoric in the Management Discussion & Analysis section of 10-K filings can help gauge the level of managerial opportunism in a firm. We find that the use of trust-related words is connected to inefficient investment decisions and poor operating performance. Furthermore, firms making more frequent use of trust-related words are subject to less monitoring by institutional investors or analysts. Their accounting also relies more heavily on discretionary accruals. These results are consistent with the notion that managerial rhetoric to advertise trustworthiness points towards agency problems plaguing the firm., Published by Aachen

Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2020; Aachen 1 Online-Ressource (x, 234 Seiten) (2020). = Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2020, Mergers and acquisitions (M&As) are carried out to be competitive in the market and to grow rapidly by capitalizing on some kind of synergies. However, many mergers and acquisitions fail due to cultural dissimilarities, agency problems, and integration issues. I seek to add to the M&A-related literature in order to create better comprehension of the underlying reasons of frequent M&A failures, however, from a different viewpoint by taking into account ‘behavioral’ element. I strive to see through the investors’ and managers’ preferences to comprehend how their preferences affect post-merger takeover performance in the long run. I begin with investigating investors’ preferences with respect to time, by employing cultural measure on long-term orientation (LTO), and the role of these preferences in defining takeover outcomes. By analyzing a large international sample on M&A deals, I offer a strong empirical evidence that investors’ time preferences have a considerable impact on long-term takeover performance. I offer empirical evidence that investors’ future orientation causes a significant improvement in takeover returns, on the other hand short-term orientation results in deteriorated takeover outcomes. I further observe that the significance of investors’ long-term orientation is stronger in countries with higher level of investor protection and for domestic deals with lower level of cultural disparities. Next, I use national culture based characteristics of individualism, uncertainty avoidance, and masculinity to investigate managerial preferences and their likely impact on long-term post-acquisition performance for the acquirers. There are certain cultural characteristics that shape managerial preferences and by doing so may cast a substantial influence on takeover performance over an extended period. I analyze a large international sample on takeover deals and conclude that national culture has a significant impact of takeover outcomes in a long run. I witness that the higher level of individualism and uncertainty avoidance prevailing in the country result in reduced level of post-acquisition risk, suggesting the presence of managerial entrenchment that ultimately reduces takeover returns. Masculinity is found to have a positive impact on deal size, signifying the presence of empire building, however, contrary to my expectations; it does not cast any damaging impact on takeover outcomes. It clearly suggests that the positive attributes connected with masculinity (e.g. assertiveness, competitiveness, and toughness) have more profound impact as compared to the negative impact of empire building. I further observe that my findings are stronger in the case of domestic deals and for less globalized firms due to lower level of cultural dissimilarities. Next, I analyze the use of positive and negative language in financial disclosures and the ability of such language to predict long-term gains to the acquirers. In order to predict long-term takeover performance, I apply textual analysis to the MD&A Section of SEC filings (10-K Form) for M&A deals taking place in the United States. My overall findings reveal that a negative managerial tone has a strong negative association with takeover performance, whereas a positive managerial tone indicates managerial confidence in merger success, and hence reflects an enhanced takeover performance over an extended period. The evidence clearly rejects the hypothesis that a positive managerial tone is interpreted as managerial ‘overconfidence’ in a merger’s success. My findings also affirm that the predictive power of a negative tone is far more pronounced than that of a positive tone and of any other sentiment word lists. Moreover, stock returns do not adjust to the textual description immediately due to investors’ general inattentiveness and inability to process subtle textual information more accurately. I also observe that the significance of predictive power of a negative managerial tone gains strength in the post-crisis period and for cross-border and for riskier deals due to the comparatively higher uncertainty associated with evaluating such deals on the basis of ‘hard information’. Finally, I investigate the usage of virtuous language in the management discussion and analysis (MD&A) section of SEC filings (10-K Form) and the prognostic power of such language for takeover performance. The empirical results, based on textual analysis, reveal that trust is negatively associated with long-term takeover performance, suggesting that managerial virtuous talk is, in practicality, an indication of lower post-acquisition gains for the acquirers in the long run. Furthermore, takeover returns are found to reflect textual information on trust with a delay, owing to general inattention and inability of investors to process soft cues inherent in textual content and to managers purposefully lulling investors to keep them from paying attention and identifying managerial misconduct. Quite interestingly, the significance of virtuous talk becomes more evident in the post-crisis period due to relatively higher uncertainty linked with evaluating such kind of deals on the basis of hard information alone. Finally, an inflated virtuous talk when coupled with pessimistic tone, the ability of managerial ‘good talk’ to create a trustworthy image and to distract investors reduces and the predictive power of managerial trust talk increases even more. Overall, it is concluded that managerial virtuous talk should not be regarded as a ‘cheap talk’. It is, in fact, very pertinent for predicting future takeover returns in the long run., Published by Aachen

Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2020; Aachen 1 Online-Ressource (X, 144 Seiten) : Illustrationen, Diagramme (2020). = Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2020, The way financial decisions are understood and handled has changed drastically over time so that new financial tools are needed to capture the multi-dimensionality of these decisions and their developments. In the context of this dissertation, these decisions relate to portfolio decisions of private investors that allocate an investment budget to various financial products. While modern portfolio theory has traditionally focused on wealth-related objectives, i.e., return and risk, recent developments in the area of thematic investments seem to go beyond these limits, as they can no longer be displayed in conventional models. Ethical concerns, personal interests, or the conformity with personal convictions motivate investors to include non-monetary objectives in their decisions. So-called thematic funds exploit this expansion of objectives to advertise their allocations. Thematic investors thereby follow a modified core satellite strategy in which conventional funds ensure diversification whereas supplemented satellite funds accommodate investors’ additional non-monetary interests. Both portfolios are separately allocated ignoring beneficial inter-portfolio correlation effects. However, modern portfolio theory has originally tried to optimize these correlation effects. Consequently, efficiency of core satellite portfolios can only be achieved by chance. This study provides more specific theoretical foundation and quantifies the efficiency of core satellite portfolio solutions. The efficiency of thematic core satellite investing is evaluated by stating a three-dimensional model for thematic investments and by comparing both portfolio solutions. Furthermore, this study develops two approaches to reduce the inefficiency of a core satellite strategy. One addresses fund providers with the idea of tailoring thematic funds to conventional ones. The other approach addresses private investors providing pragmatic heuristics for their two-portfolio decision., Published by Aachen

Dissertation, RWTH Aachen University, 2019; Aachen 1 Online-Ressource (xii, 293 Seiten) : Illustrationen, Diagramme (2019). = Dissertation, RWTH Aachen University, 2019, Despite the undisputable merits of traditional capital structure theories, they do not explain why previous research finds industry-specific leverage effects. Real estate investment trusts (REITs) are an often-cited case for such an industry-specific effect which is designated as the (mean value) “REIT debt puzzle”, since they are tax-exempt but their leverage is twice as high as that of non-real estate firms (non-REs) (50.4% vs. 24.9% for the U.S.). Hence, the four research papers of this dissertation aim to unravel some of the mystery surrounding the industry-specific leverage effects as well as the existence of the REIT debt puzzle. The first paper uses the three channels, i.e. value-based, coefficient-based and intercept-based components, to disentangle the REIT debt puzzle empirically. The results suggest that the REIT-specific industry-fixed effect and thus the REIT debt puzzle does not exist. The initial difference in leverage between REITs and non-REs is mainly a consequence of a value-based effect driven by significantly different magnitudes of tangible assets and stock returns’ risk characteristics. In addition, non-linearities in the functional relationship between leverage and its determinants, which are not sufficiently controlled for in the linear regression approaches, are the reason why the REIT debt puzzle is incorrectly identified. Expanding on the first paper, the second paper conducts a comprehensive analysis of the difference in leverage between REITs and non-REs. The findings reveal that the fixed-effect REIT debt puzzle actually cannot be understood as a simple industry-fixed effect, although it may appear this way in the case of only superficial inspection. Instead, it has to be traced back to certain non-linearity features of the relationship between capital structure factors and resulting (optimal) leverage. Since the methodology developed in this paper could easily be applied in order to solve the debt puzzle of other industries as well, our explanations bear relevance beyond the question of REITs vs. non-REs. The third paper analyses the effect of misvaluation on financial decisions. The results suggest that when misvaluation increases, both REITs and non-REs tend to increase equity, as is the prediction of market timing behaviour. However, the effects of misvaluation on debt-related decisions are different between REITs and non-REs. Specifically, when misvaluation increases, non-REs are more likely to decrease debt, but REITs tend to increase debt. The reason is that REITs are exogenously capital-constrained firms because they are forced to distribute at least 90% of their taxable income to shareholders. Hence, highly misvalued REITs need both equity and debt financing to finance new investment, which results from incorrectly valuing potential takeover synergies. Finally, the fourth paper examines the impact of underpricing the put option embedded in nonrecourse loans on a firm’s investment. Underpricing of the embedded put option results from the fact that lenders underprice the default risk of borrowers and set the lending interest rate too low relative to the deposit interest rate. This investigation reveals that underpricing of the put option has a significantly positive impact on the rate of investment because firms could gain access to low-cost credit. The four papers taken together, this dissertation makes the following main contributions to the existing literature. Firstly, it shows that the industry-specific leverage effects do not exist and that the REIT debt puzzle can ultimately be traced back almost completely to a value-based effect driven by the characteristics of tangible assets and stock returns’ risk. Secondly, a methodology is provided to analyse the debt puzzle in any specific industry. Thirdly, this doctoral thesis addresses the fact that misvaluation is a new factor resulting in a significant diversion in leverage between REITs and non-REs. Finally, underpricing of the put option embedded in nonrecourse loans is reported as a driver of the investment decision of REITs., Published by Aachen

Dissertation, RWTH Aachen University, 2017; 1 Online-Ressource(2017). = Dissertation, RWTH Aachen University, 2017, Many important economic decisions incorporate social risk, i.e. risk or uncertainty which do not arise from nature (e.g. natural disasters or health risks) but from the action of another human being. Social risk is especially ubiquitous in strategic situations, where one’s outcome does not only depend on one’s own action but on the action of another person. The present doctoral thesis studies the interplay between expectations, social preferences, and social risk taking in two particular situations.The thesis contains four essays. The first essay, which is entitled “The Twofold Beauty Premium: Preference-Based and Beliefs-Based Behavior in an Anti-Coordination Game”, reveals three results. First, individuals taking part in a two-player market entry game form beliefs about their opponents’ behavior based on stereotypes, which relate people’s physical appearance to their willingness to take social risk. Physically attractive people are expected to be more willing to take risk. Second, people seem to refrain from market entry, because they have a preference for good-looking counterparts. Third, both beliefs-based and preference-based behavior is moderated by people’s gender.Analogously, the implications of the second essay entitled “The Higher Your Expectations, the Less Your Trust: Avoiding the Experience of Unfulfilled Expectations” are threefold. Studying a binary-choice trust game, my co-authors and I find evidence for a consensus effect, which generally implies that people tend to extrapolate from their preferences to the believed preferences of others. In line with this concept, trustors form beliefs about trustees’ behavior based on their own social preferences. Moreover, trustors being optimistic with respect to their counterparts’ trustworthiness lower their willingness to trust in order to avoid their optimistic expectations being disconfirmed.In the third essay, which is entitled “Breaking the Rules: Anticipation of Norm Violation in a Binary-Choice Trust Game”, my co-authors and I investigate the role of moral expectations in a binary-choice game. More precisely, we consider the obligations which trustors assign to the trustee role. Our study reveals that trustors who consider trustees to be obligated to act trustworthily are ceteris paribus less willing to trust. The underlying reason may be that trustors attempt to hinder trustees from violating their moral obligation to reward trust.In the fourth essay, entitled “Once Bitten, Twice Shy: Trust, Trustworthiness, and the Hot-Cold Empathy Gap”, my co-author and I study a repeated binary-choice trust game, in which players take the trustor and the trustee role in a row. We find that people’s beliefs about others’ trustworthiness (i.e. whether others reward or betray trust) moderate the intrapersonal correlation between trust and trustworthiness. If subjects hold optimistic beliefs, their willingness to trust is positively related to their willingness to reward. We find a contrary relationship for pessimistic subjects., Published by Aachen

Over the last decades, urbanisation rapidly increased in European countries and forced European policy makers to adapt to those changing circumstances. In 2006, the European Commission reacted to the arising urban needs by launching the JESSICA (Joint European Support for Sustainable Investments in City Areas) initiative to promote new instruments for financing urban regeneration and renewal. In contrast to traditional grant funding, this initiative aims to provide revolving financial instruments – equity, loans, and guarantees – organised as funds and co-financed by other investors. The four working papers of this thesis analyse the whole structure surrounding these so-called Urban Development Funds (UDFs). The first paper analyses the general need for urban development funding regardless of the financial subsidy instrument. It elaborates on measuring differences among cities, regions, or countries by the use of indicators representing numerous aspects of urban life. Principal Component Analysis is used to identify a small set of indicators relevant to the comparison of urban development for each of the three geographical units: cities, regions, and countries. The second paper focuses on failures in urban capital markets and their connection to urban development projects. It analyses three main market imperfections which justify public authority intervention. Depending on the (combination of) market imperfections connected to a particular category of urban development projects, either grants or revolving instruments – equity, loans, and guarantees – are the suitable subsidy means to remedy market failures and initiate project financing. The third paper combines and extends the results of the former two papers to reveal possible regional targets for the establishment of UDFs by a three step approach. The first step consists of computing a distance measurement between possible funding targets. The second step describes the movability through former funding, i.e., the funding efficiency measured by a Data Envelopment Analysis. The last step considers the market imperfections revealed by the needs of the respective urban projects. Finally, the fourth paper analyses whether a second level of funds is beneficial in the context of urban development support. A second level diversifies among first-level funds which have restricted investment universes such as regionally focused UDFs. This multi-level fund structure is beneficial for medium to high degrees of investor’s risk aversion due to the (low) costs incurred by this additional passive fund level. All in all, this thesis broadly covers a new and unexplored topic which is of high relevance to our society today and in the near future. The overall contribution is twofold. On the one hand, it provides tools for the analysis of several aspects of urban development and its financial support. These tools enable novel objective investigations for the establishment of UDFs which are not possible up to now. On the other hand, some general insights could be gained in the four papers. First of all, it was found to be important that funding decisions rely on indicator values for the considered geographical level to ensure the coherence of actual funding needs with the allocation of funds. Second, some types of projects suggested for UDFs should rather be supported by traditional grants. Finally, a second-level fund for urban development can indeed deliver risk reduction and should not remain a purely administrational unit.

The concept of “homo oeconomicus” having prevailed in economic research for a long time, experimental research in particular has contributed to a shift of thought in recent years: People making economic decisions nowadays are considered to be also guided by social preferences. More specifically, it is assumed that people act in a reciprocal way, meaning that kindness is answered with kindness, and unkindness with unkindness. This dissertation is based on this current state of research in a twofold way: Firstly, it shows how behavior that is actually observed in our experiments can be modeled, particularly when interactions are associated with uncertainty. Secondly, it examines players’ beliefs with respect to the behavior of their co-players, and finds systematic biases, which can be assumed to distinctly influence players’ behavior.Biased beliefs are especially relevant in the first and second papers: The first paper is based on the insight that players want to proffer a lower degree of cooperation than they expect their co-players to proffer. As this condition cannot be fulfilled for all players simultaneously, it ought to result in a cooperation level of zero. In contrast, however, significant cooperation can be observed in the public goods game. This observation can be explained by players believing in higher cooperation levels of their co-players than is actually the case: Given these biased beliefs, everybody can seemingly cooperate less than the others do. Learning effects explain the typical downward trend of cooperation in repeatedly played public goods games.Also in the second paper, biased beliefs play a distinct role: Given that the receivers in the trust game return only slightly more money on average to the senders than they themselves have received, most senders ought to send no money to the receivers, that is, not trust them. In contrast, typically trusting behavior can be observed, which can be explained by recognizing that senders have exaggerated beliefs with respect to the trustworthiness of receivers. Furthermore, the experiment reveals that people – at least in anonymous interactions in the laboratory – rarely have a social motivation to trust others: While a successful interaction creates positive reciprocal utility, this utility gain is almost completely outweighed by negative reciprocal disutility caused by receivers who prove not to be trustworthy. This result contributes to the research of “betrayal aversion”: To date, the majority of the literature assumes that the disutility described above overcompensates the positive utility component, that is, that non-egoistic motives even diminish trust.As in the other two papers, players’ beliefs also play a role in the third paper: It transpires that, in the ultimatum game, which measures negative reciprocity, proposers do not underestimate the punishing behavior of responders, but instead overestimate it. A consistent finding reveals: Players overestimate the reciprocal reaction of their co-players, leading to more social behavior than would be the case with correct beliefs. Accordingly, biased beliefs can to some degree be seen as a substitute for social preferences. Furthermore, the experiment allows to gain important theoretical insights: Firstly, with uncertainty – which is present in the ultimatum game – reciprocal preferences must be modeled differently than if certainty can be assumed: With uncertainty, the reaction of a co-player can no longer be assumed to be foreseeable. Secondly, we must assume that people act in a “gradually reciprocal” way, meaning that they only reward or punish to the extent to which they regard the behavior of their co-players to be kind or unkind.Finally, in a comparison between behavior in the ultimatum game and the trust game, it is found that players who act reciprocally in one game do not necessarily do so in the other game. Thus, reciprocity is not a one-dimensional trait. This result also holds true (to a slightly smaller degree) if one controls for the players’ biased beliefs.

Modeling intertemporal decisions is essential to understand many financial decisions both at the household and at the company level. Most of the time, these decisions are very complicated and it is very difficult to develop a single model that can describe the intertemporal decision making process in different contexts. Still, this does not prevent many researchers from attempting to understand preferences of individuals in intertemporal decision setting, since people face intertemporal decisions very often. For intertemporal decision modeling, we can distinguish between two different types of theories: normative and descriptive. Normative theories try to explain how decision makers ought to approach to intertemporal decisions and they derive simple guidelines for rational decision making. The most renowned normative theory tackling intertemporal decision process is the standard discounted expected utility (DEU), which basically consists of two parts: expected utility theory and constant subjective discount rates. Despite its normative quality, expected utility theory is unable to describe the human decision process accurately in many cases, as it emanates from unbounded rationality. In reality, we observe deviations from rational human image that lead to certain unexplained puzzles such as the disposition effect or the equity premium puzzle. These puzzles can only be explained by alternative theories that integrate decision biases resulting from bounded investor rationality into the decision making process. Descriptive theories simply intend to fill this gap and explain the actual preferences in intertemporal decisions. This point sets up the motivation of this dissertation, as we analyze the relevance of these descriptive decision theories in actual intertemporal decision settings in the fields of corporate and household finance. We begin with a brief introduction presenting the standard discounted expected utility (DEU) theory that aims to solve the intertemporal decision problem. Consequently, we discuss the deviations from the assumptions of DEU model that are revealed by numerous studies. After this detailed motivation, we analyze the implications of these deviations from DEU model for corporate and household finance in four papers. We specifically focus on the relation between decision anomalies and dividend policy, cash policy, saving/borrowing decisions and credit spreads in P2P markets. Generally, we use the following approach in each one of our papers: After a brief introduction, we develop hypotheses connecting the behavioral biases to our research question based on a (mathematical) theoretical framework. Consequently, we conduct experiments in settings resembling the actual intertemporal decision process that we want to analyze. Based on these results, we investigate the connection between the behavioral biases revealed in experiments and intertemporal decisions in different scenes of corporate and household finance. In all four papers, the empirical results clearly suggest that DEU model is incapable of explaining the decision process in intertemporal setting completely and it should be extended utilizing the findings obtained in experiments analyzing human decision process from a psychological perspective. In sum, in all four papers, we reach the conclusion that the limited rationality of investors and the resulting biases identified in experiments shape the intertemporal decision process both in the fields of corporate and household finance. Furthermore, we study new behavioral patterns modifying the designs of some well-known experimental studies and demonstrate that our experiments reflect the actual preferences of individuals quite accurately. Thus, based on this work, we find supporting evidence for the general assumptions of the “Behavioral Finance” story. Additionally, our experiments also strengthen the view defending the relevance of experiments in economics, as not many researchers try to bridge the gap between “Experimental Economics” and “Household Finance”.

The first out of three papers assesses the short- and long term financial impact of firm announcements to withdraw from countries designated as State Sponsors of Terrorism. In an event-study framework, announcement period abnormal returns are analysed. Moreover, long-term return performance in the period subsequent to the withdrawals is investigated. Evidence indicates investors rewarded firms for withdrawing from the designated countries. During the period prior to announcement, sample firms experience a substantial, statistically significant stock price increase. The positive effect is more pronounced for US firms, for firms in the bank and financial trading industry and for firms in the oil and gas industry. In contrast, the long-term performance analysis does not reveal return differences attributable to terror-related considerations. During the long-term period after withdrawal, a portfolio of withdrawing firms does not display return differences to a portfolio of carefully chosen control firms. The second paper analyses the consequences of the U.S. Securities and Exchange Commission’s (SEC) publication of an online tool for detecting firms doing business in countries designated as State Sponsors of Terrorism. Similar to the first paper, short-term announcement period abnormal return reactions are analysed before long-term performance is measured. Evidence indicates investors punished firms for being mentioned in the tool. In the period subsequent to the tool’s publication, stock prices of mentioned firms decreased. Furthermore, faint evidence consistent with the notion that the portfolio of mentioned firms delivers abnormally positive long-term returns is obtained. The third paper is about ownership in such firms. As will become apparent, pension and endowment funds are substantially less likely to hold majority stakes in a firm if the firm has severe business ties in a country designated as a State Sponsor of Terrorism. For the reason that such investors shun firms with operations in the designated countries, stocks of these firms match the definition of neglected stocks in the sense of Merton’s (1987) model. In this way, positive short-term stock price reactions upon withdrawal and negative short-term stock price reactions upon stigmatisation can be reconciled by means of Merton’s (1987) theoretical groundwork. Upon withdrawal, firms overcome neglect and profit from increasing stock prices. By the same token, firms receiving the terror-label due to them being mentioned in the online tool are instantly neglected and suffer from a decrease in stock prices.