We study the effect of the recent financial crisis on corporate investment. The crisis represents an unexplored negative shock to the supply of external finance for non-financial firms. Corporate ...investment declines significantly following the onset of the crisis, controlling for firm fixed effects and time-varying measures of investment opportunities. Consistent with a causal effect of a supply shock, the decline is greatest for firms that have low cash reserves or high net short-term debt, are financially constrained, or operate in industries dependent on external finance. To address endogeneity concerns, we measure firms’ financial positions as much as four years prior to the crisis, and confirm that similar results do not follow placebo crises in the summers of 2003–2006. Nor do similar results follow the negative demand shock caused by September 11, 2001. The effects weaken considerably beginning in the third quarter of 2008, when the demand-side effects of the crisis became apparent. Additional analysis suggests an important precautionary savings motive for seemingly excess cash that is generally overlooked in the literature.
We study the liquidity properties of private equity cash flows using data from 837 buyout and venture capital funds from 1984 to 2010. Most cash flow variation at a point in time is diversifiable — ...either idiosyncratic to a given fund or explained by the fund’s age. Both capital calls and distributions also have a procyclical systematic component. Distributions are more sensitive than calls, implying procyclical aggregate net cash flows. A consequence is that the well-known finding that funds raised in hot markets underperform in absolute terms is sharply attenuated when comparing to public equities. Consistent with a liquidity premium for calling capital in bad times, we find that funds with a relatively high propensity to do so perform better in both absolute and relative terms. Venture capital cash flows and performance are considerably more cyclical than buyout, and the links between cyclical cash flows and performance are likewise stronger.
Almost one-third of actively managed, diversified U.S. equity mutual funds specify a size and value/growth benchmark index in the fund prospectus that does not match the fund's actual style. ...Nevertheless, these “mismatched” benchmarks matter to fund investors. Performance relative to the specified benchmark is a significant determinant of a fund's subsequent cash inflows, even controlling for performance measures that better capture the fund's style. These incremental flows appear unlikely to be rational responses to abnormal returns. The evidence is consistent with the notion that mismatched self-designated benchmarks result from strategic fund behavior driven by the incentive to improve flows.
Indirect Incentives of Hedge Fund Managers LIM, JONGHA; SENSOY, BERK A.; WEISBACH, MICHAEL S.
The Journal of finance (New York),
April 2016, Letnik:
71, Številka:
2
Journal Article
Recenzirano
Indirect incentives exist in the money management industry when good current performance increases future inflows of capital, leading to higher future fees. For the average hedge fund, indirect ...incentives are at least 1.4 times as large as direct incentives from incentive fees and managers' personal stakes in the fund. Combining direct and indirect incentives, manager wealth increases by at least $0.39 for a $1 increase in investor wealth. Younger and more scalable hedge funds have stronger flow-performance relations, leading to stronger indirect incentives. These results have a number of implications for our understanding of incentives in the asset management industry.
We study the relations between management contract terms and performance in private equity using new data for 837 funds from 1984–2010. We find no evidence that higher fees or lower managerial ...ownership are associated with lower net-of-fee performance. Nevertheless, compensation rises and shifts to performance-insensitive components during fundraising booms. Further, the behavior of distributions around contractual fee triggers is consistent with an underlying agency conflict between investors and fund managers. Our evidence suggests that managers with higher fees deliver higher gross performance, and highlights that agency costs are an inevitable consequence of the information frictions endemic to agency relationships.
We study how firm characteristics evolve from early business plan to initial public offering (IPO) to public company for 50 venture capital (VC)-financed companies. Firm business lines remain ...remarkably stable while management turnover is substantial. Management turnover is positively related to alienable asset formation. We obtain similar results using all 2004 IPOs, suggesting that our main results are not specific to VC-backed firms or the time period. The results suggest that, at the margin, investors in start-ups should place more weight on the business ("the horse") than on the management team ("the jockey"). The results also inform theories of the firm.
We evaluate the performance of limited partners׳ (LPs׳) private equity investments over time. Using a sample of 14,380 investments by 1,852 LPs in 1,250 buyout and venture capital funds started ...between 1991 and 2006, we find that the superior performance of endowment investors in the 1991–1998 period, documented by prior literature, is mostly due to their greater access to the top-performing venture capital partnerships. In the subsequent 1999–2006 period, endowments no longer outperform, no longer have greater access to funds that are likely to restrict access, and do not make better investment selections than other types of institutional investors. Nevertheless, all investor types׳ private equity investments continue to outperform public markets on average. We discuss how these results are consistent with the general maturing of the industry, as private equity has transitioned from a niche, poorly understood area to a ubiquitous part of institutional investors׳ portfolios.
This paper uses proprietary data from a leading intermediary to explain the magnitude and determinants of transaction costs in the secondary market for private equity stakes. Most transactions occur ...at a discount to net asset value. Buyers average an annualized public market equivalent of 1.023 compared with 0.976 for sellers, implying that buyers outperform sellers by a market-adjusted 5 percentage points annually. Both the cross-sectional pattern of transaction costs and the identity of sellers and buyers suggest that the market is one in which relatively flexible buyers earn returns by supplying liquidity to investors wishing to exit.
We examine the impact of short selling by conducting a randomized stock lending experiment. Working with a large, anonymous money manager, we create an exogenous and sizeable shock to the supply of ...lendable shares by taking high loan fee stocks in the manager's portfolio and randomly making available and withholding stocks from the lending market. The experiment ran in two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent, and the second, from June 5 to September 30,2009, with over $250 million of securities lent. While the supply shocks significantly reduce market lending fees and raise quantities, we find no evidence that returns, volatility, skewness, or bid-ask spreads are affected. The results provide novel evidence on the impact of shorting supply and do not indicate any adverse effects on stock prices from securities lending.
Using a large sample of institutional investors' investments in private equity funds raised between 1991 and 2011, we estimate the extent to which investors' skill affects their returns. Bootstrap ...analyses show that the variance of actual performance is higher than would be expected by chance, suggesting that some investors consistently outperform. Extending the Bayesian approach of Korteweg and Sorensen, we estimate that a one-standard-deviation increase in skill leads to an increase in annual returns of between one and two percentage points. These results are stronger in the earlier part of the sample period and for venture funds.
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