MUTUAL FUND MORTALITY, 12B‐1 FEES,AND THE NET EXPENSE RATIO

The Securities and Exchange Commission is currently reviewing Rule 12b‐1, which governs how fund advisors may pay for the distribution of fund shares. We provide evidence that even after adjusting for economies of scale, funds with 12b‐1 fees have higher expense ratios net of the 12b‐1 fees than do funds without such fees. This finding suggests that 12b‐1 fees are more than just a deadweight cost. We also demonstrate that 12b‐1 fees are highest for funds that ultimately fail, that the proportion of funds with 12b‐1 fees is increasing over time, and that the level of those fees is also increasing over time.     

ECONOMIC GROWTH, CONVERGENCE CLUBS, AND THE ROLE OF FINANCIAL DEVELOPMENT

This paper aims to show and test the existence of a povertytrap linked to the development of the banking sector. Our theoreticalmodel exhibits multiple steady state equilibria due to a reciprocalexternality between the banking sector and the real sector.Growth in the real sector causes the financial market to expand,thereby increasing banking competition and efficiency. In return,the development of the banking sector raises the net yield onsavings and enhances capital accumulation and growth. The aimof our econometric tests is to check the existence of multiplesteady states associated with financial and educational development.     

State lotteries and externalities to their participants

The degree of participation in state lotteries can either increase or decrease expected returns. It is theoretically possible for unfair bets to become more than fair as participation in lotteries changes. In addition, the purchase of every combination of numbers can be more than a fair bet and such a purchase may increase the expected return to other lottery players.     

The assessment: contracts and competition

A significant recent development has been the extension of marketprocesses to activities which were previously provided by thepublic sector. A central feature of newly privatised marketsis the emergence of widespread forms of contracting. Explicitcontracting is used where in the past transactions had takenplace internally within a public enterprise of a governmentdepartment. The design of efficient forms of contracting hasbeen an essential component of the development of new marketsand quasi-markets such as those in defence and health. Thispaper examines evidence of the structure of contracts and theextent to which they contribute to or detract from the efficientoperation of markets, discusses the role of contracts in somenewly emerging markets, and evaluates contracts in utilitieswhere regulation rather than competition policy is widespread.     

GAINS TO BIDDER FIRMS IN CASH AND SECURITIES TRANSACTIONS

This paper presents empirical test results of alternative hypotheses regarding differences in returns to shareholders of bidding firms that choose different payment methods (cash or securities). The evidence is consistent with the payment method signaling hypothesis, which asserts that when management of the bidding firm believes its own stock to be overvalued (undervalued), securities (cash) will be the preferred payment method. The results are not consistent with either the overpayment hypothesis or the present value/hubris hypothesis. The findings also explain the conflicting results reported in prior work on gains to bidding firms.     

Derivative mortgage securities: An overview

Derivative mortgage securities have proliferated since planned amortization and floating rate CMO classes were introduced in late 1986. Other recently created derivative securities include reverse floaters and deep-discount bonds of CMOs, CMO residuals, and stripped and senior/subordinated passthroughs. These securities, which are derived from fixed-rate mortgages, were created to meet investor demands for maturity certainly, interest rate and prepayment hedging, and enhanced credit. The rapid growth of derivative securities reflects expansion of the investor base for fixed-rate mortgages. It also suggests that these mortgages will continue to be a viable housing finance instrument in a volatile interest rate environment. For the future, the increased creation of derivative securities will make the secondary mortgage market more efficient, facilitating the funding of fixed-rate mortgage originations.The substance of this paper was originally written in late 1987 and many of the specific data reflect that time period.     

HOW MANY SMALL FIRMS ARE ENOUGH?

Individual investors are undiversified, holding on average less than four securities in their personal portfolios. The small firm literature focuses on CAPM (systematic risk, full diversification concept) premia, and the actual performance of small firm portfolios held by investors is overstated because of the presence of unsystematic risk. This paper illustrates the magnitudes of total risk for small and large firms, and the behavior of such measures as portfolio size is altered. Small firms contain more risk as shown by the finding that a diversified portfolio of small firms has greater variability than a single, typical large firm. While small firms outperform large firms, investors should be aware of the implications for small firm undiversified portfolios. Because small firms contain large amounts of unsystematic risk, diversification is important if investors are going to capture the small firm premia reported in the literature.