Combining data on brokerage commissions that mutual fund families paid for trade execution between 1996 and 1999 with data on mutual fund holdings of initial public offerings (IPOs), I document a ...robust, positive correlation between commissions paid to lead underwriters and reported holdings of the IPOs they underwrite. Moreover, I find that the correlation is limited to IPOs with nonnegative first-day returns and strongest for IPOs that occur shortly before mutual funds report their holdings, when the noise introduced by flipping is smallest. Overall, the evidence suggests that business relationships with lead underwriters increase investor access to underpriced IPOs.
Heterogeneity in Target Date Funds Balduzzi, Pierluigi; Reuter, Jonathan
The Review of financial studies,
01/2019, Letnik:
32, Številka:
1
Journal Article
Recenzirano
The use of target date funds (TDFs) as default options in 401(k) plans increased sharply following the Pension Protection Act of 2006. We document large differences in the realized returns and ex ...ante risk profiles of TDFs with similar target retirement dates. Analyzing fundlevel data, we find evidence that this heterogeneity reflects strategic risk-taking by families with low market share, especially those entering the TDF market after 2006. Analyzing planlevel data, we find little evidence that 401(k) plan sponsors consider, to any economically meaningful degree, the risk profiles of their firms when choosing among TDFs.
Abstract
The level of diseconomies of scale in asset management has important implications for tests of manager skill and the expected level of performance persistence. To identify the causal impact ...of fund size on future returns, we exploit the fact that small differences in returns can cause discrete changes in Morningstar ratings that, in turn, generate discrete differences in fund size. Using our regression discontinuity approach, we find that ratings significantly increase fund size, but that fund size has a negligible effect on fund returns. Within Berk and Green’s (2004) model, the absence of meaningful fund-level diseconomies of scale implies that the lack of performance persistence arises from a lack of fund manager skill. Alternatively, the lack of performance persistence may arise from competitive pressures outside of their model.
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.
The benefit of investment advice depends on the quality of advice and the investor's counterfactual portfolio. We use changes in the Oregon University System Optional Retirement Plan to highlight the ...impact of plan design on the counterfactual portfolios of advice seekers. When brokers are available and target date funds (TDFs) are not, brokers help participants with high predicted demand for advice bear market risk, but they recommend higher-commission options. When brokers are removed and TDFs are added, new high-predicted-demand participants primarily invest in TDFs, which offer similar market risk but higher Sharpe ratios than the broker-advised portfolios within our sample.
We study the choice between named and anonymous mutual fund managers. We argue that fund families weigh the benefits of naming managers against the cost associated with their increased future ...bargaining power. Named managers receive more media mentions, have greater inflows, and suffer less return diversion due to within family cross-subsidization, but departures of named managers reduce net flows. Naming managers became less common between 1993 and 2004. This was especially true in the asset classes and cities most affected by the hedge fund boom, which increased outside opportunities for, and the cost of retaining, successful named managers.
Because life annuities can increase the level and decrease the volatility of lifetime consumption, economists have long been puzzled by the low demand for life annuities. One potential rational ...explanation is that adverse selection drives up life annuity prices, which drives down demand. We study the choice between life annuities and lump sums made by 32,000 retiring public employees. These unique data allow us to extend the existing literature by exploiting economically significant cross-sectional and time-series variation in life annuity pricing. We find little evidence that retiree demand for life annuities rises when life annuity prices fall. We find strong evidence that demand responds to salient variation in individual characteristics, such as health, and to measures of investor sentiment, such as recent equity returns.
The independence of editorial content from advertisers' influence is a cornerstone of journalistic ethics. We test whether this independence is observed in practice. We find that mutual fund ...recommendations are correlated with past advertising in three personal finance publications but not in two national newspapers. Our tests control for numerous fund characteristics, total advertising expenditures, and past mentions. While positive mentions significantly increase fund inflows, they do not successfully predict returns. Future returns are similar for the funds we predict would have been mentioned in the absence of bias, suggesting that the cost of advertising bias to readers is small.
We estimate Moody’s preference for accurate versus biased ratings using hand-collected data on the internal labor market outcomes of its analysts. We find that accurate analysts are more likely to be ...promoted and less likely to depart. The opposite is true for analysts who downgrade more frequently, who assign ratings below those predicted by a ratings model, and whose downgrades are associated with large negative market reactions. Downgraded firms are also more likely to be assigned a new analyst. These patterns are consistent with Moody’s balancing its desire for accuracy against its corporate clients’ desire for higher ratings.
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