1. Job Market Paper
Mutual Funds Picking Crashes {PDF}
Presented: FMA European Advanced Doctoral Consortium 2022, Southwestern Finance Association 2022, City University of Hong Kong Brown Bag Seminar 2022
ABSTRACT: I propose a new measure, Active Crash Picking (ACP), to identify fund managers with stock-picking ability. ACP assesses fund managers' investment ability conditioned on whether they hold more or less price crash risk-prone stocks in their holdings. For each fund, I examine the covariance between the fund’s portfolio weight in deviation from the market weight and the underlying stock’s price crash risk. Since price crashes destroy the value of investments, ACP can more effectively identify investment ability. Funds in the top decile of high ACP subsequently underperformed their peers in the bottom decile by 2% to 4% per year from 1990 to 2017. Funds in the bottom decile of ACP tend to be smaller in size, active and younger. They attract more new money flows relative to their peers and have higher turnover. They also tend to charge higher fees. Apparently, these patterns of characteristics are market-based reflections of superior managers’ abilities. ACP exhibits strong performance persistence. This finding suggests that investment ability is more evident among mutual fund managers who hold less price crash risk-prone stocks in their portfolios.
2. The Early Bird Catches the Worm: How lasting is the value of new alternative data?
With Massimo Massa {INSEAD}, Albert K. Mensah {HEC Paris} and Vickie Tang {Georgetown University}
Under Review at Journal Financial Economics (JFE)
Abstract: This study investigates both the speed at which the information content of alternative data is impounded into the trading process and the duration of the value of such data to mutual fund managers. Using a regression discontinuity design (RDD) to identify the economic effects, we find that mutual fund managers are trading based on customer-generated comments about a company’s products and services on social media platforms. Comparatively, in the cross-section, mutual funds rely more on social media signals when funds are more actively managed and when information asymmetry is more pronounced as proxied by greater analysts’ forecast errors and more volatile cash flows. Furthermore, after controlling for the reliance on public information, funds with a greater reliance on social media signals yield higher abnormal future returns and exhibit better stock picking and market timing abilities. Interestingly, mutual funds with a greater reliance on social media signals earn higher abnormal returns only when they have private access to such data, and the abnormal return dissipates when the data becomes public.
3. Corporate Charitable Donation bias in Mutual Fund Portfolios
With Xunan Zhou {CityU-HK]
Under Review at Management Science
Abstract: We document that mutual fund managers are more likely to allocate assets to non-local firms engaged in charitable donations in the same state as the funds’ headquarters. Fund managers’ attention is drawn to these local goodwill actions by the non-local firms. This effect is influenced by firms’ political affiliations and the presence of their establishments or subsidiaries. Media coverage and social attention play a critical role in drawing managerial attention to these actions. We address endogeneity using the difference-in-differences (DiD) approach. The charitable donation bias is significant only in the first year following the firm’s charitable donation engagement. This bias is less pronounced in larger and older funds. Overall, our findings indicate the existence of a short-lived charitable donation bias in fund portfolio allocations.
4. Media's Impact on Risk Shifting {PDF}
Under Review at ”Management Science”
Presented: City University of Hong Kong 2021, The New Zealand Finance Meeting 2021, 7th International Young Finance Scholars’ Conference 2021
ABSTRACT: This paper investigates the impact of the business media coverage of fund holdings on risk-shifting in holdings by funds. We capture managers’ ex-ante risk preferences by using holdings-based risk-shifting measures. We document that the business media decreases both across-year risk-shifting and intra-year risk-shifting activities. More negative news sentiment reduces risk-shifting. The association between the business media and risk-shifting is more robust among managers with high agency issue-motivated risk-shifting incentives, such as managers who have poor past performance, or face a more convex flow-performance relationship or are less experienced. The reduction effect of the media on risk-shifting is more pronounced in bearish markets where employment risk is dominant compared to a bullish market where compensation incentives are dominant. Funds with greater business media coverage also have lower total risk exposure. We address endogeneity concerns using an instrumental variable, and the launch of Barron’s online as an exogenous shock. Conclusively, the business media serves as a vital alignment mechanism and has necessary implications for mutual fund managers and investors.
5. International Mutual Funds and Media Coverage
With Massimo Massa {INSEAD]
6. Media Coverage and The Cross-Section of Mutual Fund Herding {PDF}
With Prince Charles Aduborfour {PolyU-HK}
Won The Best Summer Paper Awards to Junior Ph.D. Students - 2020
Presented: AFA Ph.D. Student Poster Session 2022, City University of Hong Kong Brown Bag Seminar 2020
This paper shows that media coverage of fund holdings positively affects an average fund manager's herding behavior through information creation and dissemination roles. Our simple measure, called Media-Driven-Herd (MDH), captures a fund manager's tendency to herd due to media coverage. We find that low media-induced-herding funds outperform their peers by about 2.5% per year. Media is positively related to buy-herds, whereas negatively related to sell-herds. Managerial experience incentives that attenuate herding behavior are eroded by the media and managers herd in the direction of the news's informational content. Our evidence suggests that media coverage can exacerbate managerial herding behavior due to limited attention and flow catering and serves as channels that make herding effective.