Links open the paper's webpage on ssrn.
We show that whether or not shareholders benefit from greater control over corporate decisions depends on their cost of acquiring firm-specific information. Shareholder rights have a positive effect on firm value and operating performance when information costs are low, but little or no effect when these costs are high. We use two distinct natural experiments to identify this interaction between rights and information. The first experiment uses exogenous variation in governance resulting from changes in the takeover protection environment in Delaware in 1995. The second experiment uses exogenous variation in information costs due to changes in analyst coverage resulting from mergers of brokerage houses. We also show that the relationship between shareholder rights and equity returns documented in earlier papers is concentrated entirely in the sub-sample of firms with low information costs.
Abstract: This paper looks at portfolio selection by fund managers. A risk-averse manager dislikes volatility of income, which is directly related to the volatility of capital flows into the fund he manages. So the manager is averse to holding stocks that make fund flows more sensitive to performance, and hence, more volatile. This makes these stocks unpopular, and they consequently earn a return premium in the cross-section when the manager is the marginal investor. In this paper we use mutual fund holdings information to identify stocks that have made funds that held them more performance sensitive than others, and show that (i) fund managers dislike holding these stocks, (ii) these stocks earn positive abnormal returns even after controlling for previously documented sources of risk, (iii) the sensitivity premium has increased with time as funds have captured a larger share of the market, and (iv) the premium comes solely from actively managed funds, consistent with sensitivity being associated with inferences about managerial ability.
Abstract: This paper focuses on the information-value of a dissident analyst forecast. I determine dissident analysts by constructing a novel index measure based on the distance of an analyst's EPS forecast from the prevailing consensus. I then test and confirm the hypothesis that analysts who release bold forecasts possess superior information not fully recognized by the market. Next, I provide evidence that this information advantage disappears post Regulation FD, suggesting that the source of advantage outlined in this strategy was probably private information, rather than superior analyst ability in assessing public data. Finally, I relate this phenomenon to the question of limited investor attention by showing that investors do seem to appreciate the incremental information content of bold forecasts, but find it difficult to process such information when the processing requirement is more demanding. As a result, portfolio profits based on a dissidence strategy are insignificant and small in the sample of stocks followed by few analysts - where investors can easily notice the outliers- as compared to the large significant profits obtainable in the sample of stocks covered by many analysts.
"Understanding Performance-chasing Behavior in Mutual Funds: Evidence from Multi-fund Managers" (with Darwin Choi & Bige Kahraman)
(Paper will be posted soon)
Abstract: We use a recent development in the mutual fund industry — the emergence of managers who simultaneously manage multiple funds — to shed new light on performance-chasing behavior of fund investors. Consistent with theoretical models such as Berk and Green (2004), we find that flows into a fund managed by a multi-fund manager are predicted by both the manager’s performance in the corresponding fund and in the other fund he manages. Performance in one fund predicts flows into the other fund more prominently when the fund does particularly well. Nonetheless, investors do not seem to move their capital sufficiently in response to performance in the manager’s other fund. As a result, the past performance in one fund predicts the subsequent risk-adjusted performance in the other one, in contrast to the equilibrium in Berk and Green (2004). This performance predictability is mostly due to the presence of some investors who do not withdraw enough capital from a fund when their manager performs poorly in his other fund.
Abstract: We model shareholder rights as an option at the disposal of shareholders to stop projects chosen by a manager, and show that the value of this veto increases with the precision of a signal the shareholder receives about project type. The model has implications for design of regulatory policy aimed at strengthening shareholder rights.
Work in Progress:
“Firm Runs and the Commitment to Enforce Debt Contracts - Evidence from a Natural Experiment” (with Radha Gopalan and Manpreet Singh)
“Do Investors Use Prospect Theory to Evaluate Returns Distributions? Empirical Evidence from the Cross-section” (with Baolian Wang)
“Do Mutual Funds Cater to Time-varying Investor Preferences for Styles?” (with Usman Ali)
“Governance Externalities: How do Peers Respond to Exogenous Shocks to Governance Rules?”