Finance - Theses
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ItemEssays on Mutual Funds( 2023-09)In this dissertation, I look into two significant questions within the broader scope of mutual funds. Firstly, I examine the external effects of a substantial increase in mutual fund ownership in public companies. Secondly, I investigate the comparative abilities of mutual fund managers. These investigations are conducted through two separate essays, Chapter 3 and Chapter 4, where empirical studies are undertaken within the context of U.S. index funds and Chinese fixed income funds, respectively. Chapter 3 focuses on addressing the following research questions: Does the inclusion in index fund portfolios have a positive impact on information disclosure of public firms? Additionally, does securities lending enhance or offset this impact? In Chapter 4, in collaboration with my co-author, I endeavour to explore the following research questions: Do managers with a background in credit rating outperform their non-analyst counterparts in the management of fixed income mutual funds? If so, is this outperformance attributed to superior credit rating-specific skills or the acquisition of superior information through networks? The first essay, presented in Chapter 3, looks into the impact of both investment and lending activities of index funds on information disclosure of public firms. The study focuses on a sample of U.S. firms spanning from 2002 to 2017. Notably, the research reveals contrasting effects: securities lending is found to have a detrimental impact on the information environment of public firms, while index fund holdings are associated with improved information transparency and a decrease in the withholding of negative news by company managers. These findings remain robust across various tests and are particularly pronounced when examining a smaller sample utilizing the Russell 1000/2000 index reconstitution as a source of exogenous variation in index fund holdings. Additionally, the study uncovers a negative relationship between index ownership and abnormal trading activities during weeks of stock price crashes. These results support the notion that despite their prevalent securities lending and passive investing strategies, index funds have an overall positive influence on the information environment of public firms. The second essay, presented in Chapter 4, aims to examine whether bond fund managers who possess credit rating experience outperform their counterparts. The study provides evidence that, on average, bond fund managers with prior employment in credit rating agencies generate higher risk-adjusted returns than their peers. Specifically, their performance surpasses that of their counterparts by 11-16 basis points per month, indicating superior security selection and market timing abilities. Moreover, the study confirms that this outperformance stems from their industry-specific knowledge acquired through credit rating experience (specialization), rather than any informational advantage derived from their previous colleagues (network). Additionally, the study reveals net inflows to funds managed by these managers, suggesting that investors are aware of the skills possessed by analyst managers.
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ItemCorporate bond market clientele( 2018)This thesis consists of two essays that explore research questions related to corporate bond market clientele. In the first essay, I examine the investment behaviour of corporate bond mutual funds, the fastest-growing clientele for corporate bonds in recent times. Specifically, I study the extent to which the funds’ investment decisions are driven by their investment mandates. In the second essay, I draw on anecdotal and empirical evidence that shows that clientele in corporate bond markets are fundamentally different from clientele in equity markets. I apply these insights to examine how corporate policy is affected by differences between corporate bond and equity investors’ pricing of risk. Theoretical and anecdotal evidence suggests that mandates are a key determinant of mutual fund investment behaviour. However, other evidence reveals that mandates are not legally binding, and funds may have incentives to deviate. In the first essay, I compare the investment expenditure of funds with different mandates within segments of the corporate bond market. The segments categorize bonds according to maturity or credit rating. I find that, in each segment, the funds that spend relatively more (less) are those whose mandates imply that they should invest more (less) in that segment. For example, if a fund states that it targets a longer portfolio maturity, the fund invests significantly more in long-term bonds, on average, relative to funds that target shorter portfolio maturities. These results apply not only to average investment expenditure, but also to how each incremental unit of flow is allocated across segments. Results hold in subsamples of secondary market bonds, as well as new issues, regardless of whether the issuer of a new bond is a firm in which the fund already invests. Overall, my findings suggest that the investment behaviour of corporate bond mutual funds is consistent with the funds’ mandates. In the second essay, I use a dynamic investment and financing model that accounts for differences between equity and corporate bond holders’ pricing of macroeconomic risk. In line with empirical and anecdotal evidence, I calibrate the bond investor’s price of risk to be unconditionally higher than the equity investor’s, as well as volatile and independent of the macroeconomy. Relative to a counterfactual scenario in which both investors price risk identically, average market (book) leverage is 2.8 (3.3) percentage points lower. These results reveal a new quantitatively significant channel to address the under-leverage puzzle. Also, in the scenario with heterogeneous risk pricing, firms issue equity more frequently as they substitute away from debt financing. Overall, relative to the scenario with homogenous risk pricing, firms exhibit a similar, albeit slightly lower, average rate of investment.
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ItemThe role of mutual funds in the real economy( 2016)This thesis studies the roles of equity mutual funds in the real economy. I review the literature and identify two channels through which mutual funds can exert influences on the real economy: first as informed financiers in the new equity issues market and second as informed traders in the secondary market. I then focus on the first channel and present a simple of model of mutual fund intermediation to show that when mutual funds have superior screening abilities relative to retail investors, the participation of mutual funds in new equity issues conveys information about the underlying productivity of the equity issuers and hence real economic output in the macroeconomy. Empirically I find that mutual fund participation in new equity issues predicts the sensitivity of output to new issues, at both the aggregate level and the industry level. In addition, smaller net fund flows are associated with a stronger sensitivity of output to fund participation, due to funds' reduced information costs when they have less capital. At the firm level, I find that mutual fund participation positively predicts the productivity growth of the seasoned equity issuers, providing supporting evidence for the screening explanation. The results in this thesis offer a novel perspective by showing a relation between mutual fund screening and the real economy.