Mutual fund performance and manager assets: The negative effect of outside holdings

Posted on by

Abstract

We explore the relation between fund performance and the assets managed by the fund's managers that are outside the fund. Controlling for fund size, we find a negative relation between performance and the size of fund managers’ outside holdings, the number of other funds managed by a fund's managers, and the number of distinct fund categories managed by a fund's managers. This effect is driven by holdings that do not overlap with those held within the fund, and the effect's economic magnitude, while less than that of fund size, is comparable to that of fund family size and twice that of turnover. Endogeneity is addressed using fund mergers and recursive demeaning. Results suggest that manager responsibilities outside a fund significantly impact performance and that limited attention plays a role.

Currency flotation and dividend policies: Evidence from China’s central parity reform

Posted on by

Abstract

Exploiting the 2015 central parity reform in China, we examine whether and how currency flotation affects corporate payout policies. The reform shifted China's currency regime from a crawling peg to the US dollar to partial flotation, significantly increasing its currency risk. We find that firms with high foreign currency exposures reduced their cash dividends postreform relative to firms with low foreign currency exposures. The dividend reduction is more pronounced for firms with less financial hedging or less financial flexibility before the reform. Firms display asymmetrical responses to foreign exchange gains versus losses. Specifically, while firms cut cash dividends when experiencing foreign exchange losses, they do not increase cash dividends when obtaining foreign exchange gains. A falsification test shows no changes in firms’ stock dividends that do not involve cash flows. Overall, our study shows that currency flotation, through increasing currency risks, dampens firms’ cash dividends.

What drives closed‐end fund discounts? Evidence from COVID‐19

Posted on by

Abstract

This paper investigates the impact of the onset of the COVID-19 pandemic in the United States on closed-end fund (CEF) discounts. I show that CEF discounts increased after the onset of the COVID-19 pandemic in the United States, while individual investor sentiment declined. Furthermore, CEFs with higher retail ownership had a larger discount increase, which suggests that individual investor sentiment is a potential contributor to CEF discounts. This finding seems less likely to be driven by rational channels or income-driven fire sales, as shown by further analysis. Overall, the results shed light on the CEF discount puzzle using a new setting.

Financial debt contracting and managerial agency problems

Posted on by

Abstract

This paper analyzes if lenders resolve managerial agency problems in loan contracts using sweep covenants. Sweeps require a (partial) prepayment when triggered and are included in many contracts. Exploiting exogenous reductions in analyst coverage due to brokerage house mergers and closures, we find that increased borrower opacity significantly increases sweep use. The effect is strongest for borrowers with higher levels of managerial entrenchment and if lenders hold both debt and equity in the firm. Overall, our results suggest that lenders implement sweep covenants to mitigate managerial agency problems by limiting contingencies of wealth expropriation.

Does hedge fund managers’ industry experience matter for hedge fund activism?

Posted on by

Abstract

We study whether fund managers’ industry experience is an important source of value creation in hedge fund activism. We find that the targets of industry-expert fund managers realize higher activism announcement returns and better operating performance, particularly when fund managers’ industry expertise is more valuable for targets. These targets also engage in more focused acquisition and divestiture activities in industries where fund managers have experience, allocate more employees to these industries, and cut investments more in the postacquisition period. The superior performance of targets of industry-expert fund managers is robust to controlling for the endogeneity concern and the attrition bias.