Author ORCID Identifier

Date Available


Year of Publication


Degree Name

Doctor of Philosophy (PhD)

Document Type

Doctoral Dissertation


Business and Economics



First Advisor

Dr. Yoonbai Kim


This dissertation consists of three essays examining the role of risk diversification in European markets. At the economy level the first two essays seek to identify whether economic integration efforts among European countries result in sharing risks to consumption with regional neighbors, as opposed to global partners. At the firm level, the third essay seeks to understand whether managers of large companies in the United Kingdom choose less financial leverage if they are specifically compensated with more cash bonus as opposed to other forms of performance incentives.

In Essay 1, I assess the extent to which European countries diversify consumption risks and share them both within the European region and with major non-European countries. I identify that an empirical model can be obtained from a standard theoretical risk sharing framework, that allows for a direct evaluation of the extent of dependence of a country's own consumption on its own output growth, on regional output growth, and on output growth of the rest-of-world (ROW). The empirical model helps to understand whether growing European regional economic integration changes the patterns of regional and world risk sharing. Using data for 45 European and 15 ROW countries over the 1960 - 2017 sample period, I find that higher levels of risk sharing are associated with growing European Union (EU) and Eurozone (EZ) membership, but Europe's risk sharing with the ROW declines, a possible "competition effect."

In Essay 2, I point out how the long run average increase in risk sharing due to growing financial integration is often taken as given. Yet decoupling financial integration from economic integration at large may lead to very conflicting consequences on risk sharing for economically integrated countries. Using stock, money and bond markets, as well as industrial production and CPI data for European countries, I show that financial integration and real integration point in different directions, minimizing the ability to share consumption risks within Europe. Specifically I find that the European Central Bank may have made progress towards integrating money and bond markets, but stock markets are still highly globally influenced. Also real integration in production and prices is low and do not differ among advanced EU and non-EU countries. The findings give a new perspective as to why inter-country consumption risk sharing appears low in several empirical studies.

Finally, in Essay 3, the aim of the study is to investigate whether managerial earnings-based incentive influence firms' leverage policy and the extent to which this relationship is conditional on the firm earnings performance. Further, we show how firms' growth opportunities affect managerial cash compensation - leverage relationship. The paper utilize a sample of 213 non-financial and non-utility U.K. FTSE350 firms for the period 2007 – 2015. In examining these issues, we employ several econometric techniques: OLS, FE, Predicted method, and three-stage least squares (3SLS) to robustly deal with the existing leverage – cash bonus simultaneity problem. We find empirical support for our theoretical contention that managerial cash bonus induces managers to implement lower leverage policy. We further observe that the effect of managerial cash bonus on leverage is more pronounced in a well-performing firm. In addition, we find that cash-motivated executives with huge unexploited growth opportunities tend to keep low leverage level. Overall, our analyses show that the widespread usage of earnings-based incentives in the U.K executives’ compensation contract, partly explains the conservative debt policy of the U.K firms.

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