Essays in corporate finance and asset pricing

This thesis contains three chapters in asset pricing and corporate finance. In the first chapter I investigate the hypothesis that (i) poor quality mutual funds gamble to increase their volatility and (ii) they can be found in both tails of the return distribution. Sorting funds into buckets based on their return realizations, I find evidence that poor quality funds sometimes earn extremely high returns over short horizons. These funds have lower excess returns, Sharpe Ratio, and alphas than comparable funds in one to five year horizons. I find that bad funds with high short-term returns follow extreme and transient strategies with high average factor exposures and high turnover. In the second chapter I investigate the optimal re-hiring rules of investors in mutual funds. Good and bad fund managers are compensated over multiple periods and choose behavior in the presence of career concerns: their performance is evaluated by investors making re-hiring decisions. If investors cannot commit to a re-hiring rule with profitable deviations, they only re-hire a manager who trades exactly like a good manager, forcing the bad manager to engage in costly imitation. If investors can commit to a re-hiring rule with profitable deviations, they optimally choose to re-hire any manager with any positive return. The model results match empirically observed flows in mutual funds. In the third chapter I investigate limited liability, unlimited liability, and bankruptcy for entrepreneurs with credit constraints. Limited liability offers a strictly larger choice of contracts than unlimited liability for fully liquid and illiquid entrepreneur wealth. Bankruptcy is redundant with limited liability under liquid wealth, although it is useful for entrepreneurs when access to limited liability is exogenously restricted or costly. Making bankruptcy more generous with illiquid wealth strictly reduces the choice of viable contracts. The model results match empirical findings that lower barriers to entry boosts entrepreneurship while generous bankruptcy has mixed impacts on entrepreneurship.