Outsourcing Mutual Fund Management: Firm Boundaries,Incentives, and Performance

We investigate the effects of managerial outsourcing on the performance and incentives of mutual funds. Fund families outsource the management of a large fraction of their funds to advisory firms. These funds underperform those run internally by about 52 basis points per year. After instrumenting for a fund's outsourcing status, the estimated underperformance is three times larger. We hypothesize that contractual externalities due to firm boundaries make it difficult to extract performance from an outsourced relationship. Consistent with this view, outsourced funds face higher powered incentives; they are more likely to be closed after poor performance and excessive risk‐taking.     

On the equivalence of the static and dynamic asset allocation problems

A classic dynamic asset allocation problem optimizes the expected final-time utility of wealth, for an individual who can invest in a risky stock and a risk-free bond, trading continuously in time. Recently, several authors considered the corresponding static asset allocation problem in which the individual cannot trade but can invest in options as well as the underlying. The optimal static strategy can never do better than the optimal dynamic one. Surprisingly, however, for some market models the two approaches are equivalent. When this happens the static strategy is clearly preferable, since it avoids any impact of market frictions. This paper examines the question: when, exactly, are the static and dynamic approaches equivalent? We give an easily tested necessary and sufficient condition, and many non-trivial examples. Our analysis assumes that the stock follows a scalar diffusion process, and uses the completeness of the resulting market model. A simple special case is when the drift and volatility depend only on time; then the two approaches are equivalent precisely if (μ (t)? r)/σ²(t) is constant. This is not the Sharpe ratio or the market price of risk, but rather a nondimensional ratio of excess return to squared volatility that arises naturally in portfolio optimization problems.     

BIASED REFEREES?: RECONCILING RESULTS WITH THE NBA'S ANALYSIS

In a recent study, we used National Basketball Association (NBA) box‐score data over a 13‐year period including nearly 600,000 foul calls to show that NBA referees call relatively more fouls on players of another race. The NBA commissioned its own study using internal data with information on calls made by individual referees and claimed the results show there is no bias among the referees in the NBA. This paper is an attempt to reconcile these competing claims. (JEL J15, J71)     

How Effective Is Internal Control Reporting under SOX 404? Determinants of the (Non‐)Disclosure of Existing Material Weaknesses

We study determinants of internal control reporting decisions under Section 404 of the Sarbanes‐Oxley Act (SOX 404) using a sample of restating firms whose original misstatements are linked to underlying control weaknesses. We find that only a minority of these firms acknowledge their existing control weaknesses during their misstatement periods, and that this proportion has declined over time. Further, the probability of reporting existing weaknesses is negatively associated with external capital needs, firm size, non‐audit fees, and the presence of a large audit firm; it is positively associated with financial distress, auditor effort, previously reported control weaknesses and restatements, and recent auditor and management changes. These results provide evidence that detection and disclosure incentives play a role in whether existing material weaknesses are reported, which has implications for the effectiveness of SOX 404 in providing investors with advance warning of potential accounting problems.     

Ready to stop: socioeconomic status and the fertility transition in Stockholm, 1878–1926

The western fertility decline is arguably the most significant demographic change to have occurred in the past 200 years, yet its causes and processes are still shrouded in ambiguity due to a lack of individual‐level longitudinal data. A growing body of research has helped improve our understanding of the decline's causes by examining the development of socioeconomic differences in fertility using historical micro‐data, but these have largely only considered rural areas where fertility was generally slower to decline. This article contributes to the literature by utilizing individual‐level data from the Roteman Database for Stockholm, Sweden between 1878 and 1926 to examine the association of socioeconomic status and fertility and the adoption of stopping behaviour during the city's transition. Using piecewise constant hazard models and logistic regression, we find that a clear class pattern arises in which the elite were early practitioners of fertility control, followed by the working classes. As the transition unfolded, socioeconomic differences in stopping behaviour disappeared and overall fertility differentials were also minimized, both of them being consistent with patterns observed in rural populations. The implications of these findings for major explanations of the decline are discussed in the concluding section.     

INCREASED INDUSTRIAL USES OF AGRICULTURAL COMMODITIES POLICY, TRADE AND ETHANOL

Using agricultural feedstocks for industrial products affects domestic and international agricultural markets, all of which are encumbered with complex policies. This article examines the interaction of three seemingly unrelated policies: the Clean Air Act, the U.S. corn program, and European Union agricultural subsidies. More ethanol production, resulting from new regulations associated with the Clean Air Act, increases the use of U.S. corn and increases the supply of corn gluten feed, an ethanol co-product. Corn gluten feed is primarily exported to Europe under a loophole in European Union trade barriers. But recent reform of European Union farm policy will lower the price of the European grain for which corn gluten feed is a substitute. This development lowers prices for a major ethanol co-product and thus makes ethanol itself less profitable just as the demand for the fuel is expanding. NAFTA, GATT, and new technologies also play cameo roles in the story .