Mutual Fund Skills and the Performance of Corporate Acquirers

48 Pages Posted: 14 Mar 2012  

Amrita Nain

University of Iowa - Henry B. Tippie College of Business

Tong Yao

University of Iowa - Henry B. Tippie College of Business

Date Written: February 12, 2012

Abstract

Existing corporate governance research interprets positive correlation between institutional ownership and the success of mergers as evidence of active monitoring by institutional investors. The possibility that some institutional investors may have merely picked stocks that make better acquisitions is acknowledged but not investigated. This study examines stock picking on acquirers by actively managed equity mutual funds. Using different proxies for fund skills, we show that acquirers held by the most skilled funds just prior to an acquisition experience significantly better stock performance and operating performance after the merger. In the year preceding the acquisition announcement, higher-skill funds increase their holdings of the most successful acquirers and decrease their holdings of least successful acquirers. Moreover, using Active Share as a proxy for stock picking, we show that more active funds decrease holdings in all acquirers, but the decrease is largest for the least successful acquirers. The link between fund skill and post-merger performance of portfolio companies is not attributable to better monitoring by high-skill funds. Overall, these results provide strong evidence that skilled mutual funds pick the stocks of firms that subsequently make better acquisitions.

Suggested Citation

Nain, Amrita and Yao, Tong, Mutual Fund Skills and the Performance of Corporate Acquirers (February 12, 2012). Available at SSRN: https://ssrn.com/abstract=2020718 or http://dx.doi.org/10.2139/ssrn.2020718

Amrita Nain

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

Tong Yao (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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