On the Demand for High-Beta Stocks: Evidence from Mutual Funds
Susan Kerr Christoffersen
University of Toronto - Rotman School of Management; Copenhagen Business School
University of Toronto - Rotman School of Management
March 20, 2014
Prior studies have documented that pension plan sponsors rigorously monitor a fund’s performance relative to a benchmark. We use a first-difference approach to causally show that in an effort to beat benchmarks, fund managers controlling large pension assets reduce fees and increase their exposure to high-beta stocks. Managers increase beta without affecting tracking error because they strategically substitute low-beta stocks for high-beta stocks with low idiosyncratic volatility. The findings support theoretical conjectures that benchmarking pressures increase demand for high-beta stocks and help to explain their low returns. Managerial risk-taking responses to benchmarking pressures complicate financial planning for investors.
Number of Pages in PDF File: 42
Keywords: Retirement saving, agency costs, risk-taking, mutual funds, beta-return relation, volatility anomaly
JEL Classification: G11, G23working papers series
Date posted: March 15, 2012 ; Last revised: March 20, 2014
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