Using a unique dataset of corporate directors with high quality monitoring skills who serve on the boards of mutual funds, I find that the presence of such “intense monitors” on the board of a fund improves the fund governance significantly. Mutual funds with directors who have been involved in a corporate CEO turnover event, have served in an audit committee of a corporation for at least 3 years, or have served in a board of high quality governance measured by GIM index, exhibit higher managerial turnover-performance sensitivity. Moreover, I find that the outflow from institutional investors becomes less sensitive to the performance of the fund in the presence of an intense monitor, suggesting a substitution effect between external and internal governance mechanisms. I find that funds with intense monitors on board exhibit lower negative return gaps, lower window dressing activity, and have higher stock holding horizons compared to the funds without such directors. Moreover, mutual fund’s return excess volatility declines subsequent to hiring an intense monitor. The relevance and effectiveness of mutual fund boards have been questioned in theory and in empirical studies. The results of this paper suggest that directors with proper skill set can have elevating influence on fund governance.
In this paper, I test whether directors of mutual funds transfer industry-specific information into mutual funds. To this end, I construct a unique database of mutual fund board directors who also serve on the board of corporations, and I find that when a fund is connected to a specific sector through a common director, it is more likely to hold positions in the stocks of that specific sector, and is more likely to gain abnormal returns from trading in the stocks of connected sectors. Being connected to an industry is associated to increases in the holdings of mutual fund in that sector by 17%. Also, if a fund increases (decreases) its holdings in the connected sector, the sector will outperform (underperform) in the following quarter by an abnormal return of 0.47% (-0.56%). I also find that mutual funds which are indirectly connected to a sector via a common adviser, are likely to overweight in that sector. I conclude that directors of mutual funds, similar to directors of corporations, can convey information into the investment funds.
(with Omesh Kini and Mo Shen)
(with Vikas Agarwal and Haibei Zhao)