Friday, Jan. 5, 2018 2:30 PM - 4:30 PM
- Chair: Veronika Pool, Indiana University
Costly Information Production, Information Intensity, and Mutual Fund Performance
AbstractThis study examines the concentration of active mutual fund managers' stock selection efforts toward information-intense stocks and the degree to which they are successful in such efforts. Information intensity of a stock is measured by the contribution of jumps to stock return variance. We find that both skilled and unskilled fund managers are attracted to stocks with high information intensity. Moreover, the well-known phenomenon of performance persistence is only observed among funds aggressively investing in high information-intensity stocks. The effect of fund information intensity on fund performance is robust to the control of the return volatility, return skewness, and illiquidity of fund holdings as well as fund activeness. Finally, information intensity increases fund flow sensitivity to past performance. These findings suggest that, with costly information production, information intensity is an important dimension of active investment decision by fund managers and an important dimension of fund selection decision by investors.
Dynamic Liquidity Management by Corporate Bond Mutual Funds
AbstractThis paper explores dynamic liquidity management by corporate bond mutual funds. We find
that, during tranquil market conditions, these funds tend to reduce liquid asset holdings such as cash and government bonds to meet investor redemptions, temporarily increasing their exposures to illiquid asset classes. During periods with heightened aggregate uncertainty, however, they tend to scale down their assets, maintaining their allocations between liquid and illiquid asset classes and thereby sustaining liquidity of their portfolios. This dynamic liquidity management practice, while consistent with individual funds' optimizing behavior, appears to generate negative externalities on the broad nancial market: flow-induced trades in corporate bonds by these funds during high-uncertainty periods generate price pressures, which precede strong return reversals.
Competition and Cooperation in Mutual Fund Families
AbstractUsing fund compensation disclosure and measures of intra-family manager cooperation, we create an index of competitive and cooperative incentives within a fund family. We find evidence consistent with a separating equilibrium, where some fund families encourage cooperation among their managers, while other fund families encourage competition. Consistent with those incentives, the managers of competitive advisors have higher average performance, and a higher fraction of "star" funds, but higher variation in performance among funds as well. Families with more cooperative incentives are more likely to engage in cross-subsidization through cross-holding and cross-trading. Such families are also more likely to recapture outflows, and for publicly traded advisors, exhibit lower cash flow and firm stock return volatility. In examining the strategic choice between cooperative and competitive incentives, clientele plays an important role. While competitive families are more likely to manage institutional money, cooperative families are more likely to have their fund offerings marketed through a broker-distribution channel, consistent with investor demand for non-performance related characteristics.
- G1 - General Financial Markets