Based on data on publicly traded insurance firms, the first essay examines questions about the effect of large catastrophic events on insurance firms. Rather than looking at a single event, thirty catastrophic events were aggregated into quintiles and the cumulative abnormal returns around these events were found to be significantly positive over a 25 day trading window. There is no significant evidence that post-catastrophic stock returns are correlated to the magnitude of the catastrophe. The second essay analyzes the effect of a large land grant university, the University of Illinois, on the State Treasury of Illinois. If the State Treasury were acting as its own agent trying to maximize revenues, would it choose higher education as an investment versus other alternative investments. While it is true the State makes large expenditures for the operations of the University, it is also true that individuals receiving degrees on average receive higher incomes. Taxes or higher incomes offset the cost of operating the University. The study is broken out by the level of student: undergraduate, masters, doctorate, medical professional, and by function of the University. It was found that all levels of education have a positive return not only for the individual, but also for the State Treasury. This is in excess of any non-pecuniary benefits to the State of having a better educated population, or the local taxation effects on the county or city where the campus is located. These returns are found to be higher than other types of investments.

In the first essay, "Do Firms Knowingly Sell Overvalued Equity?", I develop a simple equilibrium model which shows that insider trading around seasoned equity offerings (SEO) depends on both the quality of issuing firms and insiders' exogenous consumption shocks, neither of which are known by outside investors in the model. The empirical evidence indicates that insider trading is not reliably related to the future long-term stock returns of issuing firms even though it is reliably related to their announcement period abnormal returns. Issuing firms underperform their benchmarks regardless of the prior insider trading pattern. This suggests that insiders who have purchased shares before issuing do not realize that the market has overcapitalized prior good news, and are not knowingly selling overvalued equity. The second essay, "Deposit Insurance with Changing Volatility: An Application of Exotic Options", develops a model to incorporate the bank managers' incentives to change the bank's volatility into the pricing of deposit insurance. It is assumed that the volatility of the bank's assets changes or can be changed when the assets first hit a certain level. The results show that the shareholders' equity and the deposit insurance premium can be represented as combinations of generalized versions of particular barrier options known as down-and-out and down-and-in options. Numerical examples are used to illustrate the properties of the model.