Essays on corporate finance and investment

In this dissertation, I focus on a range of topics in corporate finance and investments. The first chapter examines the relationship between gender and ethnic diversity of firm inventors, inventor diversity (ID), and future stock returns. We find that firms with diverse inventors have significantly superior stock returns than firms with more homogeneous inventors. A long-short value-weighted portfolio of firms, ranked on ID, earned a four-factor alpha of 4.32% per year. The evidence suggests that the market does not fully price inventor diversity. Inventor diversity is also positively associated with future operating performance and future innovation. Consistent with the mispricing hypothesis, we find that the ID-return predictive power is stronger for firms with low investor attention, high valuation uncertainty, and for firms in industries with more competition for products, innovation, or labor. We also find that firms with greater ID are associated with larger future earnings surprises and higher cumulative abnormal returns around subsequent earnings announcements. The second chapter analyzes the economic impact of state-level medical marijuana legalization on firm value and firm performance. We find that state-level marijuana legalization has a positive financial impact on firms, likely by affecting firms’ human capital. Firms headquartered in marijuana-legalizing states receive higher market valuations, earn higher abnormal stock returns, improve employee productivity, and increase innovation. Exploiting firm level inventor data, we directly test the human capital channel and find that post legalization, firms retain inventors that become more productive and recruit more innovative talents from out of state. The third chapter examines and contrasts horizontal, diversifying and vertical mergers in their merger activity and value creation. I find that all types of mergers tend to occur in waves. Horizontal and diversifying mergers have strong connections with stock market valuation, whereas vertical mergers are more responsive to industry-level overvaluation. Although there is no difference in the short-term performance, horizontal mergers persistently outperform diversifying and vertical mergers in the long run, with vertical mergers performing the worst. The results suggest that the difference across merger categories is significant and should be carefully considered in M&A research.