To rationalize the well-known underperformance of the average actively managed mutual fund, we exploit the fact that retail funds in different market segments compete for different types of ...investors. Within the segment of funds marketed directly to retail investors, we show that flows chase risk-adjusted returns, and that funds respond by investing more in active management. Importantly, within this direct-sold segment, we find no evidence that actively managed funds underperform index funds. In contrast, we show that actively managed funds sold through brokers face a weaker incentive to generate alpha and significantly underperform index funds.
We examine “just vote no” campaigns, a recent innovation in low-cost shareholder activist tools whereby activists encourage their fellow shareholders to withhold votes toward a director's election to ...express dissatisfaction with management performance or the firm's corporate governance structure. Grundfest 1993. Just vote no: a minimalist strategy for dealing with barbarians inside the gates. Stanford Law Review 45, 857–937 argues that a substantial withheld vote motivates directors to take immediate action to avoid further embarrassment. We find a variety of supportive evidence, including operating performance improvements and abnormal disciplinary chief executive officer (CEO) turnover, indicating that such campaigns induce boards to take actions in shareholders’ interests. Furthermore, abnormal turnover is robust to controlling for concurrent events and firm- and CEO-specific controls.
Pension funds have pursued an active role in corporate governance, although some question their effectiveness and motivations. We examine the impact and motivation of pension fund activism by ...studying the shareholder proposals of the largest, most active funds from 1987 through 1993. We find significant heterogeneity across funds in activism objectives, tactics, and impact on target firms, consistent with differing investment strategies. We find the funds are more successful at monitoring and promoting change in target firms than previously recognized. We also find no evidence to support motivations other than fund value maximization.
Union and public pension funds, the most prolific institutional activists employing low-cost targeting methods, are often accused of pursuing private benefits. Extant literature finds that unions ...representing workers, as stakeholders, are not aligned with shareholders. Limiting shareholder power may mitigate "special interest" activism but can also exacerbate managerial agency problems. In two different settings, majority approved and withdrawn shareholder proposals, we examine and find supportive evidence that the director labor market as a corporate governance mechanism can selectively mitigate the negative influence that conflicted stakeholder-shareholder union funds have over firms without stifling all influence of low-cost activists.
This study compares the relations between asset flow and performance in the retail mutual fund and fiduciary pension fund segments of the money management industry, and relate empirical differences ...to fundamental differences in the clientele they serve. A striking difference is the shape of the flow-performance relation. In contrast to mutual fund investors, pension clients punish poorly performing managers by withdrawing assets under management and do not flock disproportionately to recent winners. We interpret these and other empirical differences in the context of the manager evaluation procedures typical in each segment. We conclude that pension managers have little incentive to engage in the risk-shifting behavior previously identified among mutual fund managers.
We apply an event-study methodology on over 10,000 Morningstar star rating changes and find that Morningstar has substantial independent influence on the investment allocation decisions of retail ...mutual fund investors. It is the discrete change in the star rating itself and not the change in the underlying performance measures that drives flow. We document economically and statistically significant positive abnormal flow following rating upgrades, and negative abnormal flow following rating downgrades. In contrast to the cross-sectional flow performance literature, we find evidence of investor punishment of performance declines, some of which is evident immediately in the month of the rating change.
I examine the effect of prudent-man laws on the behavior of institutional investors. Variation in exposure to legal liability across types of investment managers allows me to disentangle the effect ...of the prudent-man laws from other potential influences on manager behavior. Bank managers significantly tilt the composition of their portfolios toward stocks that are viewed by the courts as prudent, while mutual fund managers choose not. I show that differences in the direction that bank and mutual fund managers choose to tilt may explain their portfolio performance differences over time.
We analyze whether board structure and director independence in closed-end investment companies are related to shareholder interests in ways that are consistent with boards being effective monitors. ...We report that funds with relatively low expense ratios, one measure of board effectiveness, have smaller boards, a higher proportion of board members who are legally considered independent, relatively low director compensation, and charter provisions that specify remedial action if discounts become large. Evidence from our analysis of major fund restructuring decisions, including share repurchases, open-ending proposals and right offerings, is largely consistent with the expense ratio analysis. Overall, board characteristics that we identify with effective board independence are associated with lower expense ratios and value-enhancing restructurings.
We examine the performance of mutual funds whose managers simultaneously manage portfolios with performance-based incentive fees for three account types: mutual funds, hedge funds, and separate ...accounts. Importantly, our data set is free of selection bias because it is hand-collected from mandatory SEC filings. We find that only funds whose managers also manage hedge funds significantly underperform peer mutual funds. Moreover, underperformance begins only after fund managers begin to manage a hedge fund. We find that managerial incentives and opportunities for cross-subsidization explain variation in underperformance across funds, supporting the conflicts of interest hypothesis in the debate on “side-by-side management.”
We apply an event-study methodology on over 10,000 Morningstar star rating changes and find that Morningstar has subsantial independent influence on the investment allocation decisions of retail ...mutual fund investors. It is the discrete change in the star rating itself and not the change in the underlying performance measures that drives frow. We document econnomically and statistically significant positive abnormal flow following rating upgrades, and negative abnormal flow following rating downgrades. In contrast to the cross-sectional flow performance literature, we find evidence of investor punishment of performance declines, some of which is evident immediately in the month of the rating change.
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