Throwing Darts at a Board
Friendly Investing and Information Sharing in the Asset Management Industry
Benjamin Golez, Antonino Emanuele Rizzo & Rafael Zambrana
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
Do asset managers engage in friendly investing to obtain privileged investment information? We test this hypothesis in the context of mutual fund connections to financial groups. Using brokers as the source of connections, we find that funds overweight the stock of connected financial groups and side with management in contested votes. We also find that fund performance improves with the extent of friendly investing. The improvement stems from trading the stock of companies that borrow from connected financial groups. Brokerage commissions do not drive the results. Our findings suggest that funds can obtain valuable information by acting as friendly shareholders.
What's in a Name? ESG Mutual Funds and the SEC's Names Rule
Jill Fisch & Adriana Robertson
University of Pennsylvania Working Paper, March 2023
Abstract:
As investor money flows into environmental, social and governance (ESG) mutual funds, regulators have raised growing concerns about greenwashing - specifically that a fund's name will falsely suggest that the fund invests in companies that meet certain ESG standards. To address these concerns, the SEC proposed amendments to the Investment Company Act "Names Rule." The amendments extend the scope of the Rule to funds whose names include terms such as ESG, green or sustainable. If adopted, they will require such funds to invest at least 80 percent of the value of their assets in companies that meet the standards suggested by these terms. We interrogate the SEC's concern about greenwashing and the extent to which the extension of the Names Rule is rationally directed toward addressing that concern. One challenge is that the term ESG is too broad and imprecise to provide an objective basis for determining which companies appropriately fall within an 80% bucket. A second challenge is that the concept of an 80% requirement is in tension with most mainstream ESG investment strategies. Third and perhaps most problematic, are the limitations of fund names in conveying the extent of information necessary to ensure that a fund meets the expectations of its investors. We demonstrate these concerns empirically. First, to address the SEC's concern that investors are not getting a meaningfully different product, we compare the composition of ESG funds with their most closely analogous non-ESG sister funds. Second, through the creation of synthetic Women in Leadership funds, we demonstrate the limitations of fund names in conveying sufficient information about a fund's investment strategy, even for portfolio criteria that can be measured objectively. Our findings demonstrate that the SEC's proposal is unlikely to increase investor protection and is likely to impede a variety of legitimate ESG strategies. We conclude that the SEC's effort to address greenwashing through the Names Rule reflects an overly simplistic and unworkable approach to characterizing portfolio companies and a narrow perception of plausible ESG investment strategies. Both are at odds with existing market practices and threaten further innovation.
Stock market reactions to firm visits by presidents of the United States: George H. W. Bush through Donald J. Trump
Colby Green et al.
Presidential Studies Quarterly, forthcoming
Abstract:
We examine stock market reactions to public company visits and the public comments made therein by five presidents (George H. W. Bush through Donald J. Trump) over three decades (from 1989 to 2019). We find striking evidence that investors value these visits during periods of unified government or when the president announces favorable policy. However, a president's praise during the visit and his popularity at the time of the visit do not appear to have an impact on investors' reactions. Our findings suggest that investors value affiliation with the president only when they perceive opportunities to obtain substantive policy benefits.
TAXI! Do Mutual Funds Pursue and Exploit Information on Local Companies?
David Cicero et al.
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We use New York City (NYC) taxi data to identify trips between mutual fund offices and local firm headquarters. NYC funds overweight the stocks of local firms they visit via taxi, and firm visits are associated with superior investment performance. Firm visits are elevated prior to earnings announcements, and mutual fund trades that are associated with firm taxi visits predict earnings surprises. The results are generally stronger when firm executives share educational connections. Additional tests support the conclusion that funds' local bias and investment performance are driven by portfolio managers' efforts and ability to actively gather material information.
More Risk, More Information: How Passive Ownership Can Improve Informational Efficiency
Adrian Buss & Savitar Sundaresan
Review of Financial Studies, forthcoming
Abstract:
We identify a novel economic mechanism through which passive ownership positively affects informational efficiency in the cross-section of firms. Passive investors' inelastic demand lowers a firm's cost-of-capital, inducing it to take more risk. The higher cash flow variance, in turn, incentivizes active investors to acquire more precise private information, pushing up price informativeness for firms with high passive ownership. High passive ownership also implies higher stock prices and higher stock-return variances. An increase in the aggregate size of passive investors amplifies these cross-sectional differences. We also document complementarities in firms' real investment and investors' information choices that can cause information crashes.
Customers as Friendly Shareholders: Uncovering the Complex Mutual Fund-Broker Relationship
Nitish Kumar, Yuehua Tang & Kelsey Wei
Management Science, forthcoming
Abstract:
This paper examines mutual funds' dual role as both clients and shareholders of broker banks. Mutual funds are more likely to hold and significantly overweight stocks of their broker banks. In line with the portfolio decisions, fund voting is biased toward broker management in contentious proposals. Such voting bias is inconsistent with maximizing broker banks' shareholder value yet significantly affects voting outcomes and the presence of contentious proposals at the banks' shareholder meetings. Furthermore, we show that although client funds are rewarded with preferential initial public offering allocations from connected brokers for their voting support, fund managers' engagement in reciprocal practices is ultimately determined by the economic tradeoffs they face. Our study not only uncovers a new mechanism -- being brokers' friendly shareholders -- through which the two parties maintain their quid pro quo relationships but also raises a broader concern about governance of important financial institutions.
Green Tilts
Lubos Pastor, Robert Stambaugh & Lucian Taylor
NBER Working Paper, June 2023
Abstract:
We estimate financial institutions' portfolio tilts that relate to stocks' environmental, social, and governance (ESG) characteristics. We find ESG-related tilts totaling 6% of the investment industry's assets under management in 2021. ESG tilts are significant at both the extensive margin (which stocks are held) and the intensive margin (weights on stocks held). The latter tilts are larger. Institutions divest from brown stocks more by reducing positions than by eliminating them. The industry tilts increasingly toward green stocks, due to only the largest institutions. Other institutions and households tilt increasingly toward brown stocks. UNPRI signatories tilt greener; banks tilt browner.
Angel investment and first impressions
Xing Huang et al.
Journal of Financial Economics, August 2023, Pages 161-178
Abstract:
We examine the role of first impressions in angel investor decision-making. Video stills of entrepreneurs pitching on the Shark Tank show and in Startup Battlefield competitions yield six measures of first impressions of entrepreneurs' facial traits and two principal components: one that captures general ability and the other that contrasts charm and managerial ability. We find positive associations between both components and the likelihood of entrepreneurs receiving an investment offer or winning a competition round. Post-event business outcome analyses reveal that investors internalize entrepreneurs' general ability rationally but exhibit irrational tendencies when internalizing entrepreneurs' charm and managerial ability. Investment experience mitigates investors' irrational use of charm and managerial ability cues.
Does Social Interaction Spread Fear Among Institutional Investors? Evidence from Coronavirus Disease 2019
Shiu-Yik Au, Ming Dong & Xinyao Zhou
Management Science, forthcoming
Abstract:
We study how social connectedness affected active mutual fund manager trading behavior in the first half of 2020. In the first quarter during which the coronavirus disease 2019 (COVID-19) outbreak occurred, fund managers located in or socially connected to COVID-19 hotspots sold more stock holdings compared with a control group of unconnected managers. The economic impact of social connectedness on stock holdings was comparable with that of COVID-19 hotspots and was elevated among "epicenter" stocks most susceptible to the pandemic shock. In the second quarter, social interaction had an overall negative effect on fund performance, but this effect depended on manager skill; unskilled managers who were connected to the hotspots underperformed, whereas skillful managers suffered no deleterious effect. Our evidence suggests that social connections can intensify salience bias for all but the most skilled institutional investors, and policy makers should be wary of the destabilizing role of social networks during market downturns.
Media Sentiment and Currency Reversals
Ilias Filippou, Mark Taylor & Zigan Wang
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
Analyzing 48 foreign exchange (FX) rates and 1.2 million FX-related news articles over a 35-year period, using digital textual analysis, we find that a currency reversal investment strategy that buys (sells) currencies with low (high) media sentiment offers strong positive and statistically significant returns and Sharpe ratios. The results are robust and the strategy adds value over other currency premia determinants. Analysts' forecasts systematically mispredict the reversal strategy. This is the first paper to show that price reversals based on media sentiment are a well-defined feature of the foreign exchange market.