Learning and Flows in Asset Management
Paper Session
Saturday, Jan. 8, 2022 10:00 AM - 12:00 PM (EST)
- Chair: Clemens Sialm, University of Texas-Austin
An Equilibrium Model of Career Concerns, Investment Horizons, and Mutual Fund Value Added
Abstract
We study a dynamic equilibrium model of mutual fund investing under career concerns that features investment opportunities at different horizons. Equilibrium returns are endogenously determined by competition. Short-term investment strategies can benefit fund managers by accelerating skill revelation, while the downside risk is managed by manager exit. In the steady state, a large number of new and unskilled managers exploit the value of this call option, driving down short-term excess returns. A small number of experienced and skilled managers exploit scalable long-term investment opportunities, adding substantial value. We empirically confirm our theoretical predictions using US mutual fund data.Learning from Prospectuses
Abstract
We study qualitative information disclosure by mutual funds when investors learn from these disclosures in addition to past performance. We show theoretically that fund managers with specialized strategies optimally choose to disclose detailed strategy descriptions, while managers with standardized strategies provide generic descriptions. Generic descriptions lead to errors in benchmarking by investors and thus higher volatility in capital flows. While all fund managers dislike such volatility, those with above-average factor exposures also benefit from benchmarking errors as investors incorrectly ascribe factor returns to managerial skill. The model generates a number of predictions that we are able to test empirically using a comprehensive dataset of fund prospectuses. Consistent with the model's predictions, we find that funds with standardized strategies include more boilerplate in their descriptions, grow larger and have lower flow-performance sensitivity, despite having greater fund flow volatility.Who Listens to Corporate Conference Calls? The Effect of “Soft Information” on Institutional Trading
Abstract
Active investment management using fundamental techniques (as opposed to quantitative techniques) involves a comprehensive assessment of several public sources of corporate information—including “soft information” conveyed by company management. In this paper, we explore an important conduit for fundamental information flow—the presentation and discussion of soft information that occurs during corporate conference calls (e.g., earnings conference calls). These calls represent a unique platform for the dissemination of information from corporate management to investment managers, as well as providing a regular opportunity for analysts to publicly challenge management’s dialogue about a company’s profitability outlook; that is, conference calls provide a very public venue through which stock analysts simultaneously interact, in large numbers, with firm management. Using textual analysis of a comprehensive database of transcribed U.S. corporate conference calls from 2006 to 2018, we find that institutional investors significantly react to the “tone” (sentiment) of calls in their trades of stocks. Institutions trade on the tone immediately, and up to four weeks after the call, and, thereafter, continue to trade on conference call-driven analyst recommendation revisions. The trade reaction of institutions to tone is more pronounced when the marginal value of information is higher, e.g., when information is released during the question section of a conference call, when information is released during earnings calls, and when the stock exhibits a higher degree of information asymmetry. Our paper suggests that conference calls are an important channel for stock price discovery in the post Reg-FD era.Discussant(s)
Wei Jiang
,
Columbia University
Anna Pavlova
,
London Business School
Ron Kaniel
,
University of Rochester
Richard Evans
,
University of Virginia
JEL Classifications
- G3 - Corporate Finance and Governance