• Selected
• Entire List

Abstract:
While a mutual fund's investment style influences the returns it generates, little is known about how a manager's execution of the style decision might affect performance. Using multivariate techniques for measuring the consistency of a portfolio's investment mandate, we demonstrate that more style-consistent funds tend to produce higher total and relative returns than less consistent funds, after controlling for past performance and portfolio turnover. These findings are robust across fund investment style classifications, the return measurement period, and the model used to calculate expected returns. We document a positive relationship between measures of fund style consistency and the persistence of its future performance, net of momentum and past performance effects. We conclude that the decision to maintain a consistent investment style is an important aspect of the portfolio management process.

mutual funds, investment style, performance measurement, performance persistence

Abstract:
In this paper we investigate the role of asset allocation in the performance of college and university endowment funds. Our analysis is based on a comprehensive dataset detailing the investment practice and performance of these institutional investors from 1984 to 2005. Despite their ability to implement relatively unrestricted investment strategies, and despite a wide heterogeneity in the asset allocation weights deployed, we find that the university endowments in our sample hold remarkably similar levels of asset allocation, or "passive" risk. We argue that this self-imposed passive risk budget is ultimately hurting the performance of funds that are less committed to active management. We test this hypothesis and find strong support in the data. After developing and calibrating a simple risk-budgeting model, we also document that the average endowment seems to have under-utilized its active management abilities in favor of a more passively oriented portfolio.

Endowment funds, Asset allocation, Return attribution, Investment performance

Abstract:
We examine the form, adoption rates, and economic rationale for the investment restrictions found in the contracts between mutual fund investors and managers. Based on a sample of U.S. domestic equity funds from 1994 to 2000, we find systematic patterns in the use of policy constraints that are consistent with an optimal contracting view of the fund industry. In particular, restrictions are more frequently present when it is relatively less beneficial to use direct methods to monitor manager behavior, including when (i) boards contain a higher proportion of inside directors, (ii) the portfolio manager is more experienced, (iii) the fund is managed by a team rather than an individual, and (iv) the fund does not belong to a large organizational complex. We find no evidence that low- and high-constraint funds produce different risk-adjusted returns, which is also consistent with the existence of a contracting equilibrium.

Mutual Funds, Corporate Governance, Financial Contracting

Abstract:
This study examines the motivations for and empirical performance of roll-up transactions, a special class of initial public equity offering where multiple small business entities are consolidated into a single publicly traded company. Using a sample of 47 deals initiated between 1994 and 1998, we find that the long-term stock price performance of roll-ups substantially lags that of several benchmarks. Further, measures of accounting profitability for these new firms are, on average, significantly lower than those for companies from comparable industries. An analysis of the cross-sectional variation in long-run stock performance reveals that it is important that managers and owners of companies acquired in the roll-up remain involved in the business as shareholders and directors. Further, while the market's response to announcements of subsequent acquisitions by the roll-up firms is positive, market-adjusted post-announcement returns are significantly negative. We conclude that, as an organizational form, roll-ups have not met investor expectations and have, on average, decreased shareholder value.

Roll-up; Consolidation; IPO; Going-public; Merger; Long-run performance; Ownership; Governance; Board of directors; Acquisitions

Abstract:
Several changes, such as the advances in information technology and the advent of outsourcing, led to increases in optimal firm size in many fragmented industries over the last decade. This paper studies the determinants of the success of these industry consolidations using a unique sample of firms that were created at the time of their initial public offering: rollup-up IPOs. In these transactions, many small firms merge into a shell company, which goes public at the same time. This sample allows us to follow firms from the day they were established. We find that these firms deliver poor absolute and relative stock returns, on average. Their operating performance mimics that of other firms of the industry, but does not justify to their high initial valuations. However, the average performance hides substantial cross-sectional differences. If the managers and owners of the firms included in the transaction remain involved in the business as shareholders and directors, operating and stock price performance improve dramatically, which suggests that incentive effects outweigh power struggles. Higher promoter ownership leads to a reduction in long-run performance, consistent with the view that the sponsor compensation is excessive. Restructuring activities after the IPO are unable to halt poor performance, which indicates that the proper governance structure needs to be in place from the start.

industry consolidation, roll-up, governance, incentives

Abstract:
While a mutual fund's investment style influences the returns it generates, little is known about how a manager's execution of the style decision affects portfolio performance. Using both returns- and holdings-based techniques to measure the consistency with which managers approach their investment mandates, we demonstrate that, on average, more style-consistent funds significantly outperform less style-consistent funds on a risk-adjusted basis. This result differs from portfolio turnover and expense ratio effects and is robust with respect to the period used to measure future returns. We also show that fund style consistency and the persistence of risk-adjusted performance over time are distinct influences and demonstrate the potential profitability of trading strategies based on their combined impact. We conclude that deciding to maintain a consistent investment style is an important aspect of the portfolio management process.

Style Investing, Style Consistency, Performance Persistence

Abstract:
The debate over the value of active portfolio management has often centered on whether the average active manager is capable of producing returns that exceed expectations. We argue that a more useful way to frame this issue is to focus on identifying those managers who are the most likely to generate superior risk-adjusted returns (i.e., alpha) in the future. Using a style-classified sample of mutual funds, we document several tractable relationships between observable fund characteristics and its future alpha, most notably the tendency for performance to persist over time. While median managers produce positive risk-adjusted performance approximately 45% of the time, we document a selection process that improves an investor's probability of identifying a superior active manager to almost 60%. We conclude that there is a place in the investor's portfolio for the properly chosen active manager.

Alpha, alpha persistence, manager selection, active versus passive, risk-adjusted returns, manager skill

Abstract:
This paper studies the determinants of the success of industry consolidations using a unique sample of firms established at the time of their initial public offering: roll-up IPOs. In these transactions, small, private firms merge into a shell company, which goes public at the same time. These firms deliver poor stock returns; their operating performance mimics that of comparable firms, but does not justify their high initial valuations. However, if the managers and owners of the firms included in the transaction remain involved in the business as shareholders and directors, operating and stock price performance improve, and future acquisitions are better received by the market. Higher ownership by the sponsor of the transaction leads to a reduction in performance, consistent with the view that the sponsor's compensation is excessive. These findings highlight the impact of corporate governance on performance.

industry consolidation, roll-up, ipo, incentives, governance

Abstract:
This paper develops and tests the notion that postannouncement prices from stock and option markets can be used to infer both the probability of success and timing of an attempted takeover. Using a sample of 65 cash tender offers from January 1980 to July 1989, we demonstrate that the pattern of implied stock volatilities generated from target firm options expiring around the takeover resolution date is strongly consistent with the hypothesis that prices anticipate the eventual outcome. We conclude that traders in the market for takeover candidates behave in a rational manner, although with less-than-perfect foresight.

Abstract:
This study assess the existence of institutional investment constraints. Institutional investors face constraints due to their restrictive investment policies which are not binding on individuals. These additional restrictions are a mitigation of the legal liability imposed on institutional fiduciaries by laws and regulations such as ERISA and the Prudent Investor Rule. The lack of a legal standard for determining the risk of an investment magnifies the uncertainty of liability and is a sufficient condition for the specification of minimum firm characteristics in institutional investment policy statements. Two events are studied to ascertain the extent o which institutional investment constraints are binding. The violation of an institutional investment constraint is studied with a sample of firms instituting large dividend cuts. A sample of firms added to the S&P 500 Index is sued to examine the satisfaction of an institutional investment constraint. A sub-sample of the S&P 500 additions demonstrates price behavior consistent with downward sloping demand curves. In both samples, institutional investors exhibit behavior which can be explained by the existence of binding investment constraints.

Abstract:
This paper develops and tests the notion that it is possible to use the post-announcement prices from the stock and option markets to infer both the probability of success and timing of an attempted takeover. Using a sample of 65 cash tender offers from the period January 1980 to July 1989, we demonstrate that the sequence of implied stock volatilities generated from the options of the target firm expiring both before and after the resolution date of the proposed deal exhibit a pattern strongly consistent with the hypothesis that prices are set in anticipation of the eventual outcome. We conclude that traders in the market for takeover candidates behave in a rational manner, although with less- than-perfect foresight.

Abstract:
We test the hypothesis that when their compensation is linked to relative performance, managers of investment portfolios likely to end up as "losers" will manipulate fund risk differently than those managing portfolios likely to be "winners." An empirical investigation of the performance of 334 growth-oriented mutual funds during 1976 to 1991 demonstrates that mid-year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid-year winners. Further, we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time.