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Abstract: We examine how a sample of publicly traded corporate bond issuers and institutional investors, namely corporate bond funds, assess the four major nationally recognized credit rating agencies and their role in capital markets. The results show that these issuers and institutional investors differ dramatically in their assessments about rating agencies. Specifically, the majority of institutional investors require, as a matter of formal policy, only one rating when they buy rated corporate bonds, but most issuers obtain two or more ratings. Issuers and institutional investors also differ in their assessments about whether ratings accurately reflect creditworthiness and whether agencies maintain timely ratings. In aggregate, the results suggest that differences between bond issuers and institutional investors reflect the different roles that rating agencies provide in the market place.
Credit Ratings, Credit Rating Agencies, Bond Issuers, Institutional Investors
Abstract: This study tests the hypothesis that non-domestic cross-listing is associated with increased firm visibility. We examine visibility changes on the two exchanges with the largest number of non-domestic listings: the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE). Noting that the costs associated with NYSE listing are greater than those for LSE listing, we also test the hypothesis that non-domestic cross-listing on the NYSE is associated with larger visibility increases than LSE listing. Our proxies for visibility are analyst coverage and media attention. Our tests using analyst coverage generally support our hypothesis that non-domestic cross-listing increases visibility, while tests using media attention provide partial support of the hypothesis. Further empirical tests support the hypothesis that non-domestic cross-listing on the NYSE is associated with a larger visibility increase than on the LSE, which partially compensates firms for the higher costs associated with NYSE listing. All of our results are robust to conditioning on the firm's home country capital market type (developed or emerging); the country's geographical region; analysts' tendencies to initiate coverage on firms with good prospects; and the popularity of a firm's industry or country.
Abstract: We examine the views of issuers of investment and non-investment grade industrial bonds about the four leading U.S. credit rating agencies. Based on a sample obtained from the Lehman Brothers database, we find that issuers of investment and non-investment grade bonds differ significantly in their views about credit rating agencies. In addition, we find that respondents are generally satisfied with the performance of these credit rating agencies, but their level of satisfaction is higher for S&P than Moody's. The results have implications for corporate bond participants who rely on credit ratings for corporate financing, investment decisions, and risk management.
Credit Ratings
Abstract: In this study, we provide extensive evidence on the performance characteristics of 1,118 U.S. domestic, actively managed institutional equity mutual funds. We measure performance using such measures as three-year Sharpe ratios, Jensen's alphas, and Miller's active alphas as well as annualized Russell Index-adjusted returns over multiple periods (1, 3, 5, 10, 15 years). We relate performance to fund attributes including expense ratio class, net assets, 12b-1 fees dummy, turnover ratio, beta, cash, and dividend yield. We analyze the disparity of expense ratios of actively managed institutional equity mutual funds and find that expense ratios differ widely among Morningstar categories. Consistent with previous studies involving actively managed retail equity mutual funds, we find strong evidence that the average actively managed institutional equity mutual fund cannot beat a representative benchmark after expenses. We also examine fund characteristics partitioned by expense ratio class and conduct univariate tests. We obtain mixed results concerning whether funds with low expense ratios outperform those with higher expense ratios. Our findings are sensitive to the performance measure and time period used. Compared with mutual funds in high and very high expense ratio classes, our results show that funds in low or very low expense ratio classes have significantly lower deferred loads, 12b-1 fees, management fees, and portfolio turnover. In addition, lower expense ratio funds are larger and have managers with a longer tenure. This evidence suggests that expense-conscious institutional investors should look carefully at these characteristics before investing. Our study provides new evidence that supports links between their performance of actively managed institutional equity mutual funds and fund attributes. Based on our multiple-regression regression, we find a consistently negative sign in the relation between expense ratio class and performance but statistical significance only for Miller's active alpha performance measure. There is strong support suggesting that larger institutional equity funds tend to outperform smaller institutional equity funds, which may reflect greater monitoring. This finding implies that institutional investors should focus on larger mutual funds as a means of enhancing their portfolio returns. We show that the effect of an institutional equity fund's holding cash on its performance is consistently positive and significant in six of the seven regressions. Our evidence shows statistically significant but mixed results for turnover, beta, and dividend yield. In addition, our results indicate no significant relation between performance and the existence of 12b-1 fees. Finally, we compare our results with the extant mutual fund literature in order to link any potential difference in findings to the characteristics of institutional funds. Our analysis reveals that expenses have a weaker relation with fund performance for institutional funds than retail funds because institutional funds, on average, have substantially lower expenses. However, fund asset size appears to be a more important indicator of fund performance for institutional funds than for retail funds. Finally, for both institutional funds and retail funds, a positive relation exists between a higher percentage of cash held and better fund performance. These findings warrant further investigation.
performance characteristics, actively managed institutional mutual funds, expense ratio class, Miller active alpha, 12b-1 fees, deferred loads, management fees, portfolio turnover, institutional investors, beta, dividend yield
Abstract: We investigate the relation between the performance and characteristics of 1,118 domestic, actively managed institutional equity mutual funds. The results show that large funds tend to perform better, which suggests the presence of significant economies of scale. The evidence indicates a positive relation between cash holdings and performance. We obtain mixed results involving the role of turnover, beta, and dividend yield as related to performance. We find evidence in a univariate analysis that expense ratio class is an important determinant of performance, and the results are significant in a multivariate setting using Miller's active alpha as a performance metric.
mutual funds, institutional actively managed, economies of scale, fund performance and characteristics, expense ratios, active alpha
Abstract: Because strong price competition does not characterize the mutual fund industry, we conclude that fund expenses are too high. This conclusion is consistent with the study's empirical findings that very large and significant differences exist among specifically identified funds with respect to management fees and expense ratios. Yet, there remains the question of "so what" if mutual fund expenses are too high? No one forces investors to choose funds. We find the answer in the Investment Company Act of 1940 and its requirement that independent directors have a "fiduciary duty" with respect to the reasonableness of fund fees.
We identify 67 specific mutual funds with statistically very high and 23 funds with extremely high management fees. In addition, we identify 66 funds with very high and 27 funds with extremely high expense ratios. The number of funds in each of these two management fee and expense ratio standard deviation classes each represents 1.5% of total sample funds. Investors should consider these findings carefully, as should fund researchers, financial columnists and writers, investment advisers, financial planners and regulators. We also examine the association of management fees and expense ratios to descriptive performance measures by Morningstar category overall across each of the four standard deviation classes. These measures are the Sharpe ratio, Jensen alpha, Morningstar star ratings, and five-year annualized total returns.
Management fees have a mixed association with each of the performance measures. Each performance measure is higher in the extremely high management fee class ( 3σ) than in the above average management fee class (within 1σ). ANOVA tests only show significant differences for the Sharpe ratio and Jensen's alpha Morningstar categories overall across the four standard deviation classes. A potential implication of these results is that higher management fees may add value to active portfolio management and contribute to improved performance measures. These findings add fuel to the continuing debate over active versus passive portfolio management.
Expense ratios have the expected general negative associations with each of the performance measures. These findings are consistent with previous studies by Jensen (1968), Malkiel (1995), Gruber (1996), and Carhart (1997). Yet, ANOVA tests show significant differences only for the Morningstar star ratings and five-year annualized total returns by Morningstar category overall across the four standard deviation classes. Nonetheless, our results show that expense ratios maintain their negative associations with each of the performance measures despite the mixed associations of component management fees.
actively managed, equity mutual funds, management fees, expense ratios, associations with performance
Abstract: Given their simplicity and presumed commodity-like nature, institutional S&P 500 Index mutual funds should be subject to active price competition, resulting in only nominal size-adjusted differences in expenses. We find a wide disparity among fund expense ratios and their corresponding characteristics and performance.
Overall, the evidence suggests some price competition among institutional S&P 500 Index funds, but not to the extent that they may be considered financial commodities. One explanation for the existence of high-priced index funds is that they tend to require significantly lower minimum initial purchases. Our data do not support the notion that institutional investors buy high-priced S&P 500 Index funds to access broader or lower-cost investment services from fund families. We conclude the market for institutional S&P 500 Index funds is not completely homogenous.
mutual funds, S&P 500 Index funds, financial commodities, price competition, expense ratio, performance, characteristics, standard deviation classes, retail index funds, 12b-1 fees, uninformed investors
Overall, the evidence suggests some price competition among institutional S&P 500 Index funds, but not to the extent that they may be considered financial commodities. One explanation for the existence of high-priced index funds is that they tend to require significantly lower minimum initial purchases. Our data do not support the notion that institutional investors buy high-priced S&P 500 index funds to access broader or lower-cost investment services from fund families. We conclude the market for institutional S&P 500 Index funds is not completely homogenous.
mutual funds, institutional index, financial commodity, price competition, minimum initial purchase
Abstract: In this study, we provide extensive evidence on the performance and characteristics of 1,779 U.S. domestic, actively managed retail equity mutual funds. We find that expense ratios differ widely among Morningstar categories. Overall, our results indicate that funds with low expense ratios outperform those with higher expense ratios. An implication of these findings is that retail investors generally could gain insight into fund expenses and performance prospects relative to peers if research services such as Morningstar, Lipper, and Value Line included each fund's expense ratio standard deviation class in their basic suite of data items.
Consistent with previous studies, we find strong evidence that the average actively managed mutual fund fails to outperform its benchmark after expenses. Furthermore, the probability of a fund achieving a positive risk-adjusted return increases as its expense ratio decreases. Similar findings in the past have lead many experts to conclude that investors would be better off in low-cost passively managed index funds. Our results show that expenses must be at least one and perhaps two standard deviations below the peer-group mean for investors to have close to a 50-50 chance of beating a relevant benchmark.
We also examine mutual fund characteristics partitioned by expense ratio class. Compared with funds in high and very high expense ratio classes, our major results show that those in low or very low expense ratio classes have significantly lower front-end and deferred loads, 12b-1 fees, management fees, and turnover. An implication of this evidence is that expense conscious investors should look carefully at these fund characteristics before investing.
Our study provides evidence that supports links between mutual fund performance and fund attributes. Based on our regression analysis, we find evidence suggesting that larger equity funds tend to outperform smaller equity funds, which may reflect economies of scale. We find a significant negative relation between performance and loads (especially front-end loads), turnover, and beta (specifically using three-year performance measures). In addition, our results indicate no significant relation between performance and 12b-1 fees. We find evidence of statistically significant but mixed performance results for beta, cash, and dividend yields. In general, investors should be aware of these relations before investing.
mutual funds, retail actively managed funds, expense ratios, performance, expense ratio class, characteristics, larger vs. smaller funds
Abstract: We investigate the performance and attributes of 136 retail mutual funds tracking the S&P 500 Index across diverse expense ratio classes. Our performance measures are the Sharpe ratio, Jensen's alpha, and annualized total returns. Attributes analyzed for their relation to expense ratios include front-end loads, deferred charges, 12b-1 fees, fund size, fund age, cash holdings and turnover.
The evidence shows that S&P 500 Index funds with low expense ratios outperform those with high expense ratios. Expense ratios generally decrease as 12b-1 fees and deferred charges decrease and as fund size and age increase. Investors should not view S&P 500 Index funds as being homogeneous because significant differences exist in expenses and performance among the funds.
After controlling for attributes that influence fund expense ratios, we conclude that some index funds have expense ratios that are significantly higher than the norm. Despite the often-presumed commodity-like nature of index funds, S&P 500 Index funds are not all created equal. Our evidence shows that investors tend to follow a policy of choosing those funds with low expense ratios.
mutual funds, retail index funds, performance, characteristics, expense ratio, 12b-1 fees, Sharpe index, Jensen alpha
Abstract: We investigate the relation between the performance and characteristics of 1,779 domestic, actively managed retail equity mutual funds with diverse expense ratios. We show that using expense ratio standard deviation classes is an effective method for characterizing fund expenses for investors. Using various performance measures including Russell-index-adjusted returns, the results indicate that superior performance, on average, occurs among large funds with low expense ratios, low trading activity, and no or low front-end loads. Performance is invariant with respect to whether funds have 12b-1 fees.
mutual funds, actively managed retail, performance, characteristics, expense ratios
Abstract: Conventional wisdom suggests that index funds are commodity-like in nature. If this presumption is accurate, price competition should be more evident with index funds than with actively managed funds. Thus, expenses should not vary widely among index funds using the same benchmark. In this paper, we investigate whether retail S&P 500 Index funds are a financial commodity. Specifically, we test whether expenses matter more for retail S&P 500 Index funds than for actively managed funds. Our analysis of 106 retail S&P 500 Index funds shows a wide disparity in (net) expense ratios. In addition, we find large performance differences among funds within diverse (net) expense ratio classes. Based on this evidence, we conclude that retail S&P 500 Index funds with low (net) expense ratios, on average, outperform those with high (net) expense ratios. Specifically, our univariate analysis shows that Sharpe ratios and Jensen alphas tend to increase as (net) expense ratios decline across standard deviation classes. Thus, lower (net) expense ratios result in improved risk-adjusted returns. Retail S&P 500 Index funds with low (net) expense ratios also tend to have higher annualized returns compared with those with (net) expense ratios that are high. Thus, lower costs mean larger returns.
Our multivariate model provides evidence on characteristics that investors can use to explain performance. In this OLS model, we pool the funds and use dummies and interactions for testing the relative significance of variables across retail S&P 500 Index funds and actively managed large-cap blend funds used as a control group. We find evidence that (net) expense ratio class helps to explain performance. In addition, fund size is a distinguishing variable for performance. Cash holdings and portfolio turnover generally have a positive relation with performance but loads, especially deferred loads, and 12b-1 fees typically have the opposite relation. In addition, our results show that expenses do not matter more for retail S&P 500 Index funds than for actively managed funds.
What are the implications of our findings? Mutual fund investors are likely to view index funds as financial commodities because of the common belief that such funds do not differ in any significant way, especially when tracking the same benchmark index. Evidence of large differences in (net) expense ratios across index funds casts serious doubt on using "commodity" as a descriptor. Further, this finding becomes more serious because price competition should be even more competitive among index funds, especially in the pricing of (net) expense ratios. Apparently, it does not. This implies that some uninformed investors are paying high costs without receiving commensurate benefits.
This study provides an important lesson for mutual fund investors who are interested in retail S&P 500 Index funds. Namely, (net) expense ratios have a direct negative impact on performance. Low cost does not characterize all retail S&P 500 Index funds. Some funds charge fees and incur expenses that are too diverse along the range of outcomes to be consistent with commodities. Thus, when comparing mutual funds, investors should generally seek to minimize expenses because additional fees provide no apparent economic benefit.
Abstract: Conventional wisdom suggests that index funds are commodity-like in nature. If this presumption is accurate, price competition should be more evident with index funds than with actively managed funds. Thus, expenses should not vary widely among index funds using the same benchmark. In this paper, we investigate whether retail S&P 500 Index funds are a financial commodity. Specifically, we test whether expenses matter more for retail S&P 500 Index funds than for actively managed funds. Our analysis of 106 retail S&P 500 Index funds shows a wide disparity in (net) expense ratios. In addition, we find large performance differences among funds within diverse (net) expense ratio classes. Based on this evidence, we conclude that retail S&P 500 Index funds with low (net) expense ratios, on average, outperform those with high (net) expense ratios. Specifically, our univariate analysis shows that Sharpe ratios and Jensen alphas tend to increase as (net) expense ratios decline across standard deviation classes. Thus, lower (net) expense ratios result in improved risk-adjusted returns. Retail S&P 500 Index funds with low (net) expense ratios also tend to have higher annualized returns compared with those with (net) expense ratios that are high. Thus, lower costs mean larger returns. Our multivariate model provides evidence on characteristics that investors can use to explain performance. In this OLS model, we pool the funds and use dummies and interactions for testing the relative significance of variables across retail S&P 500 Index funds and actively managed large-cap blend funds used as a control group. We find evidence that (net) expense ratio class helps to explain performance. In addition, fund size is a distinguishing variable for performance. Cash holdings and portfolio turnover generally have a positive relation with performance but loads, especially deferred loads, and 12b-1 fees typically have the opposite relation. In addition, our results show that expenses do not matter more for retail S&P 500 Index funds than for actively managed funds. What are the implications of our findings? Mutual fund investors are likely to view index funds as financial commodities because of the common belief that such funds do not differ in any significant way, especially when tracking the same benchmark index. Evidence of large differences in (net) expense ratios across index funds casts serious doubt on using "commodity" as a descriptor. Further, this finding becomes more serious because price competition should be even more competitive among index funds, especially in the pricing of (net) expense ratios. Apparently, it does not. This implies that some uninformed investors are paying high costs without receiving commensurate benefits. This study provides an important lesson for mutual fund investors who are interested in retail S&P 500 Index funds. Namely, (net) expense ratios have a direct negative impact on performance. Low cost does not characterize all retail S&P 500 Index funds. Some funds charge fees and incur expenses that are too diverse along the range of outcomes to be consistent with commodities. Thus, when comparing mutual funds, investors should generally seek to minimize expenses because additional fees provide no apparent economic benefit.
Abstract: For investor and institutional class index mutual funds that track the S&P 500 Index, there are just 25 funds with statistically low expense ratios (management fee findings are found above). However, there are only five index funds—all investor class—with statistically very high and extremely high expense ratios. Thus, these results contain both bad and good news for investors.
Unfortunately, the complete story of high expense ratios for S&P 500 index funds finds more bad news. The Sharpe ratio, Jensen's alpha, annualized total return, Morningstar Star ratings, and average net assets are all statistically negatively correlated with index funds with statistically high expense ratios. Further, portfolio turnover and 12b-1 fees are statistically positively correlated with index funds with statistically high expense ratios.
S&P 500 index mutual funds, expense ratio, management fees, risk/return performance measures, portfolio turnover, 12b-1 fees, statistical relationships
Abstract: It is not enough to say that particular mutual funds have very excessive and most excessive expense ratios. In addition, these high cost funds are associated with negative portfolio characteristics that include more risky and less diversified portfolios, higher trading costs and lower earnings. Further, these high cost funds are associated with performance attributes that include lower risk/return performance based on three measures and lower total returns over two time periods.
The complete word, then, is that mutual funds with high expense ratios - whether two or three standard deviations above the mean of their Morningstar category are further associated with both negative portfolio characteristics and performance attributes.
mutual funds, expense ratios, portfolio characteristics, trading costs, earnings, total returns, risk, risk/return performance, performance attributes
Abstract: This study provides insights about the motives for mergers and acquisitions (M&As) as well as divestitures and the practices used to value targets during 1990-2001. The survey evidence shows that the primary motivation for M&As is to achieve operating synergies while the top-ranked reason for divestitures is to increase focus. The results also show that most firms believe diversification is a justifiable motive for acquisitions most notably as a means of reducing losses during economic downturns. Discounted cash flow methods dominate market multiples as the preferred approach for valuing both publicly-held and closely-held companies. Perhaps the most surprising finding is that although firms often define merger cash flows as the equity cash flows from the target, the discount rate used by acquiring firms is their own WACC rather than the targets' cost of equity. This finding reflects one of the most persistent bad practices in valuing M&As and might lead to overpayment to targets.
Abstract: We analyze the expense ratio and attributes affecting the performance of 136 retail S&P 500 Index funds. These funds are among the simplest of financial vehicles. Nonetheless, the expense ratios and performance of these benchmark trackers differ significantly.
Our univariate analysis shows that mutual fund performance, as measured by the median Sharpe ratios, Jensen’s alphas and annualized total returns, increases as expense ratios decrease.
In addition, a positive relation exists between expense ratios, deferred charges and 12b-1 fees. By contrast, fund size and age are negatively related to expense ratios. Thus, our analysis of mutual fund expenses suggests expense-conscious retail investors should look carefully at the deferred charges, 12b-1 fees, size and age of the S&P 500 Index fund before investing.
Our multivariate model provides evidence that the expense ratios help to explain performance; that is, lower expense ratios are strongly related to higher returns.
What are the implications of our findings? Investors often view index mutual funds as financial commodities because of the often-held assumption that funds tracking the same benchmark index should not differ in any meaningful way. Our evidence of large differences in expense ratios across retail S&P 500 Index funds casts serious doubt on this term as a descriptor of these funds. One explanation for the presence and enduring popularity of high-priced index funds is that some uninformed investors are paying high costs without receiving commensurate benefits. Another explanation is that such funds tend to require significantly lower minimum initial purchase amounts. The evidence suggests that despite less-than-perfect price competition among the whole of S&P 500 Index funds, the S&P 500 Index funds with the lowest expense ratios (Quartile 1) attract the majority of retail investors’ funds.
500 index mutual funds, retail funds, performance, expense ratios, deferred charges, 12b-1 fees, fund size, fund age, financial commodity, less-than-perfect competition, uninformed investors, minimum initial purchase
Abstract: This study reports the results of a 1999 survey of Nasdaq-listed firms. Respondents provided information about the importance of 22 different factors that influence their dividend policy. Our results suggest that many managers of Nasdaq firms make dividend decisions consistent with Lintner's (1956) survey results and model. The results also show significant differences between the manager responses of financial and non-financial firms on nine of the 22 factors. This finding implies the presence of industry effects on dividend policy decisions. In general, the same factors that are important to Nasdaq firms are also important to NYSE firms.
Abstract: Corporate managers often cite improved visibility as a motive for listing. Recent studies suggest that firms list after a period of strong growth, which may also attract increased visibility. This study examines listing as a determinant of firm visibility levels. We compare visibility changes for a large sample of firms that listed on the NYSE to a matched sample of firms remaining on Nasdaq. The evidence shows that NYSE listing leads to visibility gains when measured by the number of analysts following a firm as well as institutional ownership. However, additional tests show that the gains in visibility are not due to listing but instead appear to be related to pre-listing financial performance.
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