Do actively managed mutual funds exploit stock market mispricing?

Constructing a proxy for mispricing with 15 well-known stock market anomalies, we examine whether actively managed mutual funds exploit mispricing. We find that, in the aggregate, mutual funds overweight overvalued stocks and underweight undervalued stocks relative to a passive benchmark, and this tendency is explained by the ill-motivated trades of agency-prone fund managers. In addition, we find that mutual funds with the highest weights in undervalued stocks outperform those with the highest weights in overvalued stocks by an annualized three-factor alpha of 2.12% (t = 2.38), implying that slanting portfolios based on our proxy helps mutual funds improve performance.     

CEO overconfidence and agency cost of debt: An empirical analysis of CEO turnover events

We develop a model and characterize the differences between the investment policies of a rational CEO and an overconfident CEO. In the presence of risky outstanding debt, we show that an overconfident CEO has the incentive to overinvest more than that of a rational CEO. However, this incentive is mitigated by the discipline imposed by outside investors when an overconfident CEO seeks external financing. In contrast, when the firm has sufficient internal funds to meet its investment needs and outstanding debt is relatively safer, the overconfident CEO has no necessity to seek external funds and the overinvestment incentive persists. We examine bondholders’ and stockholders’ reaction around CEO turnover announcements and find evidence consistent with the over investment hypothesis.     

Interest-rate and calendar-time effects in money market fund and bank deposit cash flows

We examine the sensitivities of aggregate balances of retail and institutional money market funds (MMFs) and their potential substitutes, bank deposits, to changes in short-term interest rates while controlling for calendar-time effects. We find that institutional MMF and time deposit cash flows are sensitive to recent changes in short-term interest rates. Institutional MMF investors appear to take advantage of arbitrage opportunities created by MMFs using the amortized cost technique. Retail MMF investors are much less responsive to changes in interest rates.     

The nonlinear price dynamics of U.S. equity ETFs

We investigate the price dynamics of large market-capitalization U.S. equity exchange-traded funds (ETFs) in order to uncover trader motivations and strategy. We show that prices of highly liquid ETFs can deviate significantly from their daily net asset values. By adjusting for changes in valuations, we report the impact of non-classical variables including price trend and volatility using data from 2008 to 2011. We find a cubic nonlinearity in the trend suggesting that traders are not only aware of the underreaction of others, but also self-optimize by anticipating others’ reactions, and sell when the uptrend is stronger than usual.     

Liquidity,bank runs,and fire sales under local thinking

We examine the implications on banking crises when markets are populated by agents that neglect tail risks and form expectations conditioned on a favorable subset of possible states of the economy. We find that optimal bank liquidity is lower than would be the case under rational expectations, and, consequently, the banking system is more vulnerable to adverse shocks, which lead to bank runs. Asset pledgeability of surviving banks is also affected so that their capacity to raise external funds for purchasing assets of distressed banks is weakened. Further, we examine the case when asset returns are correlated through securitization. In this case adverse shocks are felt uniformly across the banking sector and banks that survive with the help of a public liquidity backstop will become risk-averse and reluctant to purchase distressed assets. Finally, we explore a government funded asset purchase program, that is implemented with an asset price target.     

Pension Funding Constraints and Corporate Expenditures*

This paper examines the impact of a company's pension contributions (PCs) on its dividend and investment policies. The effects of shocks to cash flows on these corporate expenditures are identified by changes to pension funding regulations. Using a sample of DB pension schemes in FTSE350 UK‐listed firms we find a strong negative relation between PCs and corporate dividends even after controlling for the correlation between funding status and unobserved investment opportunities. We find that the more stringent funding requirements under the Pensions Act 2004 had a more pronounced effect on both dividend and investment sensitivities to PCs.     

Do European capital flows comove?

We study the cross-section correlations of net, total, and disaggregated capital flows for the major source and recipient European Union countries. We seek evidence of changes in these correlations since the introduction of the euro to understand whether the European Union can be considered a unique entity with regard to its international capital flows. We make use of Ng’s (2006) “uniform spacing” methodology to rank cross-section correlations and to shed light on potential common factors driving international capital flows. We find that a common factor structure is suitable for equity flows disaggregated by sign but not for net and total flows. We only find mixed evidence that correlations between types of flows have changed since the introduction of the euro.     

New insights into mutual fund brokerage commissions

Using data collected from equity mutual fund reports filed by single-fund registrants to the Securities and Exchange Commission, I study the determinants of brokerage commissions paid by fund managers when they buy or sell securities and investigate the role these commissions play in fund performance. Consistent with related studies, my results from cross-sectional analyses reveal that higher portfolio turnover funds are associated with higher commissions and larger funds incur lower commissions, as well as the positive relation between expense ratios and commissions. This positive relation is puzzling as most commissions include “soft dollars” for payments of products and services that should be already covered by the costs reported under expense ratios. However, once I take into account unobservable fund heterogeneity, I find that higher expense ratio funds do not necessarily pay higher commissions. Further, controlling for whether a fund increased commission payments as the result of flow-induced trading, I show that the underperformance related to brokerage commissions documented in the literature is attributable (at least partly) to higher level of fund flows.     

Slowdown of credit flows in Jordan in the wake of the global financial crisis: Supply or demand driven?

This paper estimates a disequilibrium model of credit supply and demand to evaluate the relative role of these factors in the slowdown of credit flows in the Jordanian economy in the wake of the global financial crisis. The empirical analysis suggests that the credit stagnation is mainly driven by the restricted credit supply amid tighter monetary policy conditions in Jordan relative to the United States, as evidenced by the widened interest differential between the Central Bank of Jordan (CBJ) re-discount and the U.S. Federal Reserve funds rates. Although it appears that demand side factors related to the slowdown of economic activity have also had an impact, their role has been relatively modest. The estimation results imply that economic policies targeted towards stimulating the supply of credit are likely to be a more effective tool for expanding credit flows relative to demand stimulating policies.     

Biting the hand that fed it: Did the stock market boom of the late 1990s impede investment in manufacturing?

The stock market increase in the 1990s may have diverted funds from fixed investments in manufacturing to other investiments, such as share repurchases, and to firms with faster stock price gains. We find that overall investment remained lower than it could have been without the stock price appreciation. We also find that manufacturing investment was impeded by the developments in the stock market. Based on our results, the policy focus should be on offering incentives for corporate decision makers to prioritize productive investments over other uses of funds instead of means to entice lenders to increase lending to manufacturing firms.     

World Bank lending and regulation

Does World Bank lending promote deregulation with stronger incentives and critical resources or slow the process by blunting the impact of crises and indirectly promoting state control? This paper analyzes empirical links between aid flows and regulatory burden. Econometric estimates based on panel data for 83 aid receiving countries over 5 year periods from 1970 to 2000 find that World Bank lending, while not specifically targeting high or low regulatory states, is linked to lower subsequent regulation. This link holds for multilateral donors more broadly while bilateral donor funds apparently fail to influence the level of regulation.     

A comparison of corporate versus government bond funds

We examine four separate classifications (high quality corporate, general corporate, government Treasury, and general government) of investment grade bond funds over the 1994–2009 period. We verify that distinct differences exist in investment styles across the classifications. We also document significant differences in performance as corporate funds outperform government funds by a risk adjusted average of 8 to 53 basis points on an annual basis depending on the model used. The performance differences are not strictly a function of expenses and are robust to alternative evaluation metrics. An examination of cash flows to the funds indicates that investment dollars are driven by the differences in risk adjusted performance.     

Learning about individual managers’ performance in UK pension funds: The importance of specialization

This study examines the performance of managers over time, as well as its persistence, taking into account both manager characteristics and market conditions. Applying parametric and non-parametric methodologies, we examine a sample of UK equity pension fund managers. Our results help to understand the importance of manager assignments in the industry and reveal the importance and benefits of management specialization. We find certain manager performance persistence, revealing that some managers are better than others and possess superior investment skills. Additionally, we find that managers achieve better results when they run a single fund or one investment-objective funds, which allows managers to focus on specific tasks. Nonetheless, manager performance varies with market conditions and highlights managers’ different skills. Specialist managers perform better in bullish markets, and generalists perform better in bearish periods.     

Growth option,debt maturity and cash reserves with bank-tax-interaction

In this paper, we assume a small and micro enterprise(SME, henceforth) invests in a project, of which the investment cost is funded by the private lending and the bank-tax-interaction (BTI, henceforth). We build a tractable model of optimal investment, liquidity and default decisions based on cash flows with liquidity shocks and profitability uncertainty. In contrast to the case with pure private lending, we discover that BTI delays investment and increases the firm value. Furthermore, BTI causes the SME to retain more cash reserves. We also find that the SME prefers to select the BTI as the main financing policy under the higher liquidity risk and small profitability uncertainty. Besides, the impact of debt maturity on financial policies with BTI depends on liquidity shock.     

Investment decisions and debt financing under information uncertainty

This study examines how information uncertainty influences investment decisions. In contrast to prior studies, which assume no information uncertainty, our model includes a discrepancy in valuing debt between shareholders and debtholders at the time of debt issuance. We derive the values of corporate securities and the optimal investment threshold and coupon under information uncertainty. We show that compared with the absence of information uncertainty, debtholders value debt less than shareholders do, and hence, shareholders should contribute more investment funds. Debt financing restraints due to information uncertainty lead to delayed investment. We find that information uncertainty plays a mitigating role in shareholder-debtholder conflicts over investment policy. Moreover, the information uncertainty costs that shareholders incur increase sharply with the level of information uncertainty.     

Convertible bond issuance volume,capital structure,and firm value

We investigate whether convertible bond (CB) issuance volume that causes capital structure change would affect firm value. We focus on either the hand-collected data due to multiple CB issues or diverse CB issuance volume (CB-IV) measures, including CB-IV over debt, equity, and assets. We reveal that the firms with higher CB-IV would enhance firm value, somewhat different from previous findings that CB might not be a cheap financing instrument for raising funds. We infer that because increased CB-IV might not be easily permitted by Taiwan authorities, enterprises might endeavor to exploit profits by using the funds raised by CBs. We argue that, to our understanding, our explored issues are essential for enterprises because they link CB-IV and firm value through the capital structure channel. Given that these issues have rarely been a comprehensive focus, this study may contribute to the existing literature.     

Affiliated block shareholders and analyst optimism

We investigate several previously under-documented conflicts of interest that may result in analyst optimism by utilizing two unique features of brokerage firms in China, namely, the dominant ownership of large shareholders within the brokerage firms and the mandatory disclosure of brokerage firms’ commission income derived from each mutual fund client. We show that controlling shareholders of an analyst’s brokerage-firm put pressure on the analyst to report more optimistically biased earnings forecasts and recommendations to the stocks they hold larger positions in. We also find that the magnitude of analyst optimism increases with the shareholdings of the mutual funds that contribute commission fees to the analyst’s brokerage firm. These findings remain robust after incorporating a regulation change that reduces conflicts of interest in the brokerage industry and higher dimensional fixed effects, and thus are unlikely to be driven by reverse causality or omitted variable bias.     

开放式基金的资金流量对投资组合的影响分析

对单个基金来说,基金流量会影响到投资者的收益,其中的途径就是通过影响基金的投资组合,文章实证检验了由基金资金流入或流出引发的基金资产组合交易变动的程度,同时验证了基金“流动性动机交易”在中国基金市场上确实存在。     

Herding in Open-end Funds: Evidence from China

This paper aims to detect the herding of Chinese open-end fund managers and examine the role that structural features of their industry play in their herding. The herding behaviour is investigated by employing the cross-sectional absolute deviation (CSAD) model, drawing on the Chinese open-end fund market for the 2007–2020 period. Our findings suggest that the presence of herding has been confirmed in all other types of funds except for income funds, with their herding being mainly driven by non-fundamental factors. Most types of funds show more pronounced herding when the market is rising and the fund flow is positive. Up markets foster positive fund flows, which promote herding to a certain extent. The structural characteristics of fund networks of common asset holdings produce an impact on the fund herding. Herding is observed in the network with larger centrality index and the disassortative network. Moreover, we also find that herding in most types of funds is more pronounced under conditions of high volatility and high economic policy uncertainty, and the fund herding tends to grow inversely with fund-size.     

Fee waivers for tax-exempt money market mutual funds

In this study we investigate why tax-exempt money market mutual funds often waive fees. Contrary to statements in the popular press, our results provide weak evidence that fee waivers lead to asset growth. We find strong evidence, however, that fee waivers are used to keep the fund’s reported yield in line with competitors. We find that funds have comparable before-expense yields and that smaller funds generally have higher expenses. If all expenses were charged to investors, then smaller funds would significantly underperform larger funds. Thus, in order to keep reported yields in line with competitors, smaller funds must waive a significant portion of fees.(JEL G20, G21)