What characteristics of mutual funds do investors care about? In addition to performance and fees, we show that investors exhibit a clear preference for managers who adhere to the strategies they describe in their prospectuses. Capital flows respond negatively when funds diverge from the average holdings of their text-based strategy peer groups, but positively when they outperform those peer averages. We identify this effect using a novel instrumental variables approach, and show that funds face a delicate trade-off between keeping their promises and outperforming their peers who make similar promises."    

Abis, Simona; Lines, Anton. Broken promises, competition, and capital allocation in the mutual fund industry. Journal of Financial Economics. Dec2024, Vol. 162, pN.PAG-N.PAG.    

Related Articles

Using granular data on U.S. hotel investments over the past two decades, we show that industry-specialist PE firms achieve higher net income from operations and higher capital gains from sale than generalist PE firms for comparable properties. Those results are driven by specialists implementing more and larger cost savings without compromising revenues. Fundamentally, specialists utilize their hotel-specific operating expertise to produce superior performance outcomes. We show that specialists across investment sectors possess deeper industry-specific operating expertise. Our results suggest that specialist PE firms can compete with their generalist rivals by leveraging such expertise in a chosen market niche.    

Spaenjers, Christophe; Steiner, Eva. Specialization and performance in private equity: Evidence from the hotel industry. Journal of Financial Economics. Dec2024, Vol. 162, pN.PAG-N.PAG.    

Related Articles

In large and complex human groups, social rules reduce individuals' uncertainty about their own choice set, including through these rules' simultaneous influence on the choice set of other individuals. But uncertainty varies as to the extent to which it is knowable and quantifiable ex ante. Therefore, different classes of social rules deal with the future uncertainty of individuals' conduct in structurally distinct ways, with institutions and norms being the hallmark example of this distinction. Institutions, through their costly definition and enforcement by a known organization, require specific delineation of behavior and penalties ex ante, meaning they of necessity confront “known unknowns” (risk), or the conduct of members of an organization that can be predicted ex ante. Norms, in contrast, are only effective in shaping behavior if sufficiently shared within a community, which means their application is automatic in expectation to an individual ordering their conduct considering potential norms. This makes norms apply to ex ante known and unknown situations alike, relative to the precision that the articulation of institutions requires with respect to human behavior. Although digital governance carries the benefits (and costs) of considerable institutional “completeness,” governance by protocol is nonetheless incomplete in the face of the complex set of exogenous shocks and human actions that a given digital networked organization will experience. This means digital institutions need to mimic the adaptability of institutions more generally, through the institutional mechanisms of flexibility detailed in this analysis. More generally, though, the fact that norms can serve as a complementary gap‐filler in contexts where institutions do not reach suggest that digital organization designers cannot avoid simultaneous consideration of the human community of network users that will define the norms that become crucial in periods of true uncertainty for any organization.

Alston, Eric. Norms, institutions, and digital veils of uncertainty—Do network protocols need trust anyway? Regulation & Governance. Sep2024, p1.

Related Articles

Little is known about the motivations and outcomes of sellers in remunerated markets for human materials. We exploit dramatic growth in the U.S. blood plasma industry to shed light on the sellers of plasma. Sellers tend to be young and liquidity-constrained with low incomes and limited access to traditional credit. Plasma centers absorb demand for nontraditional credit. After a plasma center opens nearby, demand for payday loans falls by over 13% among young borrowers. Meanwhile, foot traffic increases by over 4% at nearby stores, suggesting that constrained households use plasma markets to smooth consumption without appealing to high-cost debt.

Dooley, John M; Gallagher, Emily A. Blood Money: Selling Plasma to Avoid High-Interest Loans. Review of Financial Studies. Sep2024, Vol. 37 Issue 9, p2779-2816.

Related Articles

Using a novel data set of over 3,500 public and private firms, we construct the network of executive and director connections prior to the 1929 financial market crash. We find that more connected firms have 17% higher 10-year survival rates. Consistent with a working capital channel, the results are strongest for small, private, cash-poor firms, and firms located in counties with high bank suspension rates. Moreover, connections to cash-rich firms that increase accounts receivable matter the most. Our results suggest that network connections can play a stabilizing role during a financial crisis by easing the flow of capital to constrained firms.

Babina, Tania; García, Diego; Tate, Geoffrey. Friends During Hard Times: Evidence from the Great Depression. Journal of Financial & Quantitative Analysis. Sep2024, Vol. 59 Issue 6, p2647-2694.

Related Articles

This article uses a structural model to show that foreclosures played a crucial role in exacerbating the recent housing bust and to analyse foreclosure mitigation policy. We consider a dynamic search model in which foreclosures freeze the market for non-foreclosures and reduce price and sales volume by eroding lender equity, destroying the credit of potential buyers, and making buyers more selective. These effects cause price-default spirals that amplify an initial shock and help the model fit both national and cross-sectional moments better than a model without foreclosure. When calibrated to the recent bust, the model reveals that the amplification generated by foreclosures is significant: ruined credit and choosey buyers account for 25.4% of the total decline in non-distressed prices and lender losses account for an additional 22.6%. For policy, we find that principal reduction is less cost-effective than lender equity injections or introducing a single seller that holds foreclosures off the market until demand rebounds. We also show that policies that slow down the pace of foreclosures can be counterproductive.

Guren, A. M., & McQuade, T. J. (2020). How do foreclosures exacerbate housing downturns? The Review of Economic Studies, 87(3), 1331-1364.

Homes exposed to sea level rise (SLR) sell for approximately 7% less than observably equivalent unexposed properties equidistant from the beach. This discount has grown over time and is driven by sophisticated buyers and communities worried about global warming. Consistent with causal identification of long-horizon SLR costs, we find no relation between SLR exposure and rental rates and a 4% discount among properties not projected to be flooded for almost a century. Our findings contribute to the literature on the pricing of long-run risky cash flows and provide insights for optimal climate change policy.

Finance: Bernstein, A., Gustafson, M.T. and Lewis, R., 2019. Disaster on the horizon: The price effect of sea level rise. Journal of Financial Economics, 134(2)
 

We study sources of investor disagreement using sentiment of investors from a social media investing platform, combined with information on the users' investment approaches (e.g., technical, fundamental). We examine how much of overall disagreement is driven by different information sets versus differential interpretation of information by studying disagreement within and across investment approaches. Overall disagreement is evenly split between both sources of disagreement, but within-group disagreement is more tightly related to trading volume than cross-group disagreement. Although both sources of disagreement are important, our findings suggest that information differences are more important for trading than differences across market approaches.

 Cookson, J. Anthony and Niessner, Marina, Why Don't We Agree? Evidence from a Social Network of Investors (March 6, 2019). Journal of Finance, Forthcoming.

Using data on over 57,000 low-income tax filers, we estimate the effect of Medicaid access on the propensity of households to save or repay debt from their tax refunds. We instrument for Medicaid access using variation in state eligibility rules. We find substantial heterogeneity across households in the savings response to Medicaid. Households that are not experiencing financial hardship behave in a manner consistent with a precautionary savings model, meaning they save less under Medicaid. In contrast, among households experiencing financial hardship, Medicaid eligibility increases refund savings rates by roughly 5 percentage points or $102. For both sets of households, effects are stronger in states with lower bankruptcy exemption limits – consistent with uninsured, financially constrained households using bankruptcy to manage health expenditure risk. Our results imply that expansions to the social safety net may affect the magnitude of the consumption response to tax rebates.

 Gallagher, Emily and Gopalan, Radhakrishnan and Grinstein-Weiss, Michal and Sabat, Jorge, Medicaid and Household Savings Behavior: New Evidence from Tax Refunds (March 11, 2019). Journal of Financial Economics (JFE), Forthcoming; 9th Miami Behavioral Finance Conference 2018.

Why do crime rates differ greatly across neighborhoods and schools? Comparing youth who were assigned to opposite sides of newly drawn school boundaries, we show that concentrating disadvantaged youth together in the same schools and neighborhoods increases total crime. We then show that these youth are more likely to be arrested for committing crimes together – to be “partners in crime”. Our results suggest that direct peer interaction is a key mechanism for social multipliers in criminal behavior. As a result, policies that increase residential and school segregation will – all else equal – increase crime through the formation of denser criminal networks.

Deming, D. J., Billings, S. B., & Ross, S. (2016). Partners in crime: Schools, neighborhoods and the formation of criminal networks. ().National Bureau of Economic Research. doi:10.3386/w21962