Do Socially Responsible Index Investors Incur an Opportunity Cost?

We construct index‐tracking portfolios using integer programming and then compare the tracking errors and performances of portfolios formed from an unrestricted and socially screened stock universe. We find that one can construct a portfolio of socially responsible stocks that deliver market performance. Thus, the exclusion of a set of stocks from consideration does not exhaust the existence of efficient index‐tracking portfolios, especially when the exclusionary screen is for nonfinancial reasons. Our results are robust to various specifications in constructing the portfolio, for example, number of stocks included in the portfolio and weighting schemes, and robust to alternative tracking error measurement; we show that the difference induced from conducting socially responsible screen is never statistically significant.     

Why Do Fund Families Release Underperforming Incubated Mutual Funds?

Although the average incubated mutual fund outperforms nonincubated funds by up to 3.41% annually, a large number of released funds underperform during incubation. We find that launching underperforming incubated mutual funds is associated with objectives that attract large inflows and lower relative risk. These findings are consistent with the use of incubation to maximize fee revenue through means other than the flow‐to‐performance relationship. We also find that underperforming incubated funds are incubated longer suggesting that families release funds opportunistically to take advantage of outperformance when it is observed.     

Do Managerial Skills Vary Across Fund Managers? Results Using European Mutual Funds

This paper uses stochastic dominance techniques to examine whether managerial skills vary across fund managers in European equity funds. The use of these techniques allows us to compare different investment alternatives in an uncertain setting under very simple assumptions regarding investor behaviour. The results for style-adjusted returns are consistent with varying degrees of managerial skill and cannot be explained by the impact of the choice of style-adjustment procedure, country, fee policy, and fund age, fund size or survivorship bias. This result allows us to conclude that style-adjusted returns may provide a reliable guide for selecting European investment funds.     

Who Charges More: Hedge Funds or Mutual Funds?*

Explicit mutual fund fees are typically less than 1% of the assets under management. By comparison, the typical hedge fund charges a base fee of 2% plus a performance fee equal to 20% of net profits. Thus, hedge funds appear to charge far more for even comparable performance—unless one takes account of the following:

• ? For most mutual funds, a very high percentage of performance is driven by its passive exposure to the market, even though the fee is applied to the total fund.
• ? Many hedge funds are designed to provide returns that are completely independent of market performance.

Using these two assumptions, the author provides a simple example that shows that a representative mutual fund's performance can be replicated by combining an index fund, which represents the mutual fund's passive component, with a hedge fund, representing the mutual fund's active component. When analyzed in this way, the fee of the combined fund turns out to be remarkably close to the actual fee of the mutual fund. This in turn suggests that the implicit fee for the mutual fund's small active component is comparable to the fees of the hedge fund.     

Do Hedge Funds Manipulate Stock Prices?

We provide evidence suggesting that some hedge funds manipulate stock prices on critical reporting dates. Stocks in the top quartile of hedge fund holdings exhibit abnormal returns of 0.30% on the last day of the quarter and a reversal of 0.25% on the following day. A significant part of the return is earned during the last minutes of trading. Analysis of intraday volume and order imbalance provides further evidence consistent with manipulation. These patterns are stronger for funds that have higher incentives to improve their ranking relative to their peers.     

Reversing the Question: On What Does the Turnover of Mutual Funds Depend? Evidence from Equity Mutual Funds in Chile

Abstract:

The purpose of this research is to study the factors that influence portfolio turnover in equity mutual funds in Chile. The main result of this research indicates that turnover is related to a combination of variables associated with efficiency, and with behavioral and agency problem hypotheses. In addition, negative effects of turnover are observed on the returns from the funds; positive effects are observed on portfolio liquidity. This study should be of interest to policymakers who regulate and monitor the delegated portfolio management industry in developing countries, as well as individual and institutionalinvestors concerned about the efficiency and performance of their investments.     

Why Do Mutual Fund Advisory Contracts Change? Performance,Growth, and Spillover Effects

We examine changes in equity mutual funds' investment advisory contracts. We find substantial advisory compensation rate changes in both directions, with typical percentage fee shifts exceeding one‐fourth. Rate increases are associated with superior past market‐adjusted performance, whereas rate decreases reflect economies of scale associated with growth, and are not associated with extreme poor performance. There are within‐family spillover effects. Superior (e.g., star) performance for individual funds is associated with rate increases for a family's other funds. Rate reductions post‐2004 by family funds involved in market timing scandals do not have large industry spillover effects.     

Does Faith Matter in Mutual Funds Investing? Evidence from Saudi Arabia

This article investigates one of the most vital issues in the Islamic mutual fund literature: Are there any costs associated with investing in Islamic mutual funds? We used a unique sample of 143 Saudi mutual funds and grouped them into portfolios based on their geographical focus, Shariah compliance, and the Saudi market trend (overall, bull, bear, and the crisis period). Findings suggest there is a benefit from adhering to Shariah law in locally-focused Saudi mutual funds. However, there is a cost of this adherence in internationally-focused Saudi mutual funds. Finally, in Arab-focused Saudi mutual funds, there is neither a cost nor a benefit.     

Why Does Performance Persistence Vary Among Closed-End Funds?

This study extends the research on closed-end fund performance persistence by investigating whether the persistence of both net asset value (NAV) and market price returns of U.S. registered closed-end funds is related to various fund characteristics. The sample consists of 505 closed-end funds, which are investigated over the period from January 1976 to December 1996. The analysis tests whether persistence is related to the fund characteristics size, goal, management fees, turnover, fund family membership, fund experience, and the exchange on which a fund is traded. The results vary across holding periods used to calculate persistence but are similar with respect to the NAV and market price returns. Funds with lower expense ratios and funds traded on the NYSE show more persistence of strong NAV and market price performance.     

Why Do Individual Investors Disregard Accounting Information? The Roles of Information Awareness and Acquisition Costs

We investigate the frictions that impede individual investors’ use of accounting information and, in particular, their costs of monitoring and acquiring accounting disclosures. We do so using an archival setting in which individuals are presented with automated media articles that report both current earnings news and past stock returns. Although these investors have earnings information readily available, we find no evidence that their trades incorporate it. Instead we find that their trading responds to the trailing stock returns presented in the articles. Our study raises questions about the efficacy of regulations that aim to aid less sophisticated investors by increasing their awareness of and access to accounting information.     

Do Investors Expect Mean Reversion in Asset Prices?

We investigate the existence and source of equilibrium mean reversion in UK non-financial and financial asset prices over the period 6 April, 1981, through 31 October, 1995. Our results indicate substantial expected transitory components in commodity and metals markets but report expected mean reversion for financial assets only at the near to maturity horizons. Implied cash flow yields appear to have a role in driving the mean reverting process particularly at short horizons while the role of interest rate movements varied across assets and across maturities. Our results reject the existence of a common risk premium across market term structures.     

Do Funds Make More When They Trade More?

We model fund turnover in the presence of time‐varying profit opportunities. Our model predicts a positive relation between an active fund's turnover and its subsequent benchmark‐adjusted return. We find such a relation for equity mutual funds. This time‐series relation between turnover and performance is stronger than the cross‐sectional relation, as the model predicts. Also as predicted, the turnover‐performance relation is stronger for funds trading less‐liquid stocks and funds likely to possess greater skill. Turnover is correlated across funds. The common component of turnover is positively correlated with proxies for stock mispricing. Turnover of similar funds helps predict a fund's performance.     

How Do Investors Interpret Announcements of Earnings Delays?

Unlike in the case of delays of 10‐K or 10‐Q filings, the SEC does not require managers to disclose delays of earnings announcements to the public. Thus, for companies that are unable to report earnings by their expected date, managers face a decision: remain silent or announce the delay. Prior research has investigated all earnings delays, whether or not they are accompanied by announcements of the delay announcement, and found that the market reaction is slightly negative, on average, for companies that allow their expected earnings dates to pass without disclosing results. It's not clear, however, whether this negative reaction was due to the absence of news or to the information contained in the announcements of the earnings delays. The authors' recent study documents that earnings delay announcements are associated with an average one‐day abnormal stock return of a negative 6%. This statistically as well as economically significant reduction in value is consistent with anecdotal evidence in the popular business press as well as predictions of disclosure theories, in particular the explanation that concerns about legal liability and managerial reputation motivate managers to disclose bad news. The study also shows that almost all managers who announce earnings delays attempt to influence the market reaction by disclosing the underlying cause. Finally, the study shows that the market reaction to earnings delay announcements is positively related to future earnings changes, consistent with the role of these disclosures in providing a signal of deteriorating financial performance.     

Do Foreign Investors Encourage Value-Enhancing Corporate Risk Taking?

This paper examines whether foreign investors in Korea affect incentives for firms to take risks in corporate investment. The short-term focus of foreign investors encourages managers to engage in conservative investment behavior. On the other hand, foreign investors encourage managers to focus on long-term value rather than short-term returns as active participants in corporate governance. These competing views are examined by testing for the association between foreign ownership and variations in corporate cash flow, a proxy for the risk of chosen investments. Furthermore, we examine whether risk taking is positively associated with firm growth, which is a primary concern in debates regarding the myopic behaviors of foreign investors. The results show that firms with high foreign ownership are less likely to avoid risk taking—and that risk taking is, in turn, positively associated with firm growth, implying that foreign investors perform a monitoring function in encouraging value-enhancing risk taking.     

Why Do Banks Provide Leasing?

Banks are engaging in leasing activities at an increasing rate, which is demonstrated by aggregated data for both European and U.S. banking companies. However, little is known about leasing activities at the bank level. The contribution of this paper is the introduction of the nexus of leasing in banking. Beginning from an institutional basis, this paper describes the key features of banks’ leasing activities using the example of German regional banks. The banks in this sample can choose from different types of leasing contracts, providing the banks with a degree of leeway in conducting business with their clients. We find a robust and significant positive impact of banks’ leasing activities on their profitability. Specifically, the beneficial effect of leasing stems from commission business in which the bank acts as a middleman and is not affected by the potential defaults of customers.     

Why Do U.S. Firms Hold So Much More Cash than They Used To?

The average cash-to-assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase is that at the end of the sample period, the average firm can retire all debt obligations with its cash holdings. Cash ratios increase because firms' cash flows become riskier. In addition, firms change: They hold fewer inventories and receivables and are increasingly R&D intensive. While the precautionary motive for cash holdings plays an important role in explaining the increase in cash ratios, we find no consistent evidence that agency conflicts contribute to the increase.     

Does It Pay to Be Socially Responsible? Evidence from Spain's Retail Banking Sector

This paper extends the research on the relation between financial performance and corporate social responsibility in two respects. First, it develops a model of strategic competition that includes consumer perceptions with respect to firm social performance. It is shown that in the presence of a positive valuation of social responsibility practices by consumers, a firm that endorses this responsible behaviour may obtain a better strategic position in the market, along with higher margin, demand, and profit. Second, the model's predictions are tested with a sample of Spanish banking firms. The empirical analysis confirms that consumers significantly value other features apart from price in making deposit and mortgage decisions, particularly a financial institution's social responsibility. A more disaggregated analysis shows first, that not every CSR dimension has relevance for consumers and second, that customers equally value activities that can have a direct impact on their well‐being (e.g., culture and leisure), as well as other activities that can be viewed more generally as public goods (e.g., heritage and the environment). These conclusions are of interest in the debate about a firm's social or ethical activities. It is shown that, provided that consumers value corporate social responsibility activities, firms can improve both their competitive position in the market and their profits by behaving in a socially responsible manner. Therefore, the design and implementation of corporate social responsibility practices could confer upon firms an initial competitive advantage over their competitors.