We find that workers who experienced adverse labor market conditions during the depression are less likely to invest in risky assets. This result is robust to a number of control variables and it holds for individuals whose income, employment, and wealth accumulation were unaffected by the experiences. The consequences of experiences travel in social networks: individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments.
Our measure of local labor market conditions stratifies the sample according to each worker’s region and occupation, and calculates how the rate of unemployment in each region occupation cell changed compared to years prior to the depression. We then relate labor market conditions to investment in risky assets measured nearly two decades after the depression.
This study provides empirical evidence on the role of disclosure in resolving agency conflicts in delegated investment management. For certain expenditures fund managers have alternative means of payment which differ greatly in their opacity: payments can be expensed (relatively transparent); or bundled with brokerage commissions (relatively opaque). We find that the return impact of opaque payments is significantly more negative than that of transparent payments. Moreover, we find a differential flow reaction that confirms the opacity of commission bundling.
For certain goods and services managers can bundle their payments with the commissions paid to brokers for trade execution. Bundling payments reduces fund assets with no income statement recognition, in contrast to the alternative of expensing the payment (i.e. including it in the fund‟s income statement). This reduces transparency on two fronts. First, expensed payments are widely reported via the expense ratio whereas commission payments are reported only in relatively obscure SEC filings. Second, expensed payments are itemized whereas commission payments are not. Therefore a comparison of the performance impact of expensed payments to that of bundled payments for comparable goods and services provides direct insight into the role that disclosure plays in mitigating agency costs.
Our central hypothesis is that greater transparency in fund operating expenditures results in lower agency costs, i.e., better return performance.
Using exogenous wealth shocks stemming from the collapse of the housing market, we show that managers who experience substantial losses in their home values subsequently reduce the risk in their delegated funds. The decline in fund risk comes through reductions in idiosyncratic risk and tracking error, suggesting that the behavior is likely driven by career concerns. Our paper provides evidence that the idiosyncratic personal preferences of mutual fund managers affect their professional decisions and offers a methodology for testing for manager effects that is not subject to the selection critique of Fee, Hadlock, and Pierce (2013).