Mutual fund flows and fluctuations in credit and business cycles

Several measures of credit-market booms are known to precede downturns in real economic activity. We offer an early indicator for all known measures of credit booms. Our measure is based on intra-family flow shifts towards high-yield bond mutual funds. It predicts indicators such as growth in financial intermediary balance sheets, increase in shares of high-yield bond issuers, and downturns of various measures of credit spreads. It also directly predicts the business cycle by positively predicting GDP growth and negatively predicting unemployment. Our results provide support for the investor demand-based narrative of credit cycles and can be useful for policymakers.     

Form or substance: the role of business plans in venture capital decision making

We explore a well‐known instance of fast decision making under high uncertainty, venture capital (VC) opportunity screening. We analyze a sample of 722 funding requests submitted to an American VC firm and evaluate the influence of the form of the submission and content of business planning documents on VC funding decisions. We improve on prior literature by a) using a large sample of known representativeness, b) relating request characteristics to actual VC decisions, and c) developing an inferential logic that takes account of the multiple sources of information to which VCs have access. We find that the presence of planning documents and some information contained therein are weakly associated with VC funding decisions. Based on our inferential strategy, we find that this information is learned independently of its inclusion in the business planning documents. Copyright © 2009 John Wiley & Sons, Ltd.     

Measuring investor sentiment with mutual fund flows

We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of “noise” in aggregate market prices induced by investor sentiment.