Mutual Firms Research Articles

Labor Mobility and Capital Misallocation in the Mutual Fund Industry

If capital won’t come to fund managers, fund managers will go to capital. I document that fund managers move across mutual fund firms to manage amounts of capital that better match their skill, which improves the allocative efficiency of capital across fund managers. For causal identification, I exploit exogenous shocks to fund managers’ ability to switch firms due to state-level changes to non-compete laws. In states that strengthen the enforceability of non-compete agreements, the propensity of fund managers to switch mutual fund firms is halved, capital misallocation across managers increases by about 10%, and the sum of monthly value added of managers declines by over $25 million. These results indicate that fund managers’ mobility across firms plays an important role in the efficient allocation of capital within the mutual fund industry.

Retained Asset Accounts and Creditor Reactions to an A.M. Best Change

AbstractA variety of research has investigated the impact of rating changes on stakeholder and firm behavior. This article provides a unique setting to analyze the effect for both stock and mutual firms and with a class of nontraditional investors, owners of retained asset accounts (RAAs). These individuals become creditors of the insurer upon receipt of life insurance proceeds, which are held in the general accounts of the insurer. The funds receive limited guaranty fund and no Federal Deposit Insurance Corporation protection, thus subjecting the owner to the financial risk of the insurer. Some owners of RAAs may not understand the risk; thus, it is unclear if these owners act as other creditors to changes in the financial stability of the insurer. This provides a setting to analyze reaction to firm risk, as reflected in ratings changes, to stakeholders other than stockholders or customers. We find that RAA owners do act in a manner consistent with traditional investors. Specifically, we find that abnormal retention in the RAAs indicates significant declines in the level of accounts open and funds deposited in the year following a threshold downgrade (falling below an A–) of the A.M. Best rating.

A Sustainable Future for Corporate Governance Theory and Practice

With this paper we show how the natural “science of control and communications in the animal and the machine” identified by Wiener in 1948 can be applied to social organizations to establish a science of governance. Evidence is provided that current practices are not consistent with the laws of nature or the practices of living things that must become self-regulating and self-governing to exist in dynamic unknowable complex environments. Case studies of stakeholder mutual firms with hundreds of boards show how an ecological form of polycentric decision-making provides: (a) division of powers; (b) checks and balances; (c) distributed intelligence to reduce information overload, and (d) decomposition of decision-making labour to introduce tensions of challenge; (e) a requisite variety of cross checking communication and control channels from stakeholder engagement to improve their integrity; (f) integration of management and governance to further self- regulation and self-governance with: (g) operating advantages such as resiliency, sustainability and wellbeing for firm, its stakeholders and society. The case studies illustrate how ecological governance could reduce the size, scope, cost and intrusiveness of government and their regulators while improving economic efficiency and enriching democracy with widespread citizen stakeholder engagement.

Market Socialism and Community Rating in Health Insurance

Almost 100 years ago, Ludwig von Mises and Friedrich Hayek argued that a socialist state could not determine marginal cost prices and therefore could not allocate resources rationally. Oskar Lange and Abba Lerner responded with the market socialist model. Subsequent scholars have refined the model (Leeman, Roemer). Views on market socialism for an entire economy are mixed (Phelps, Shleifer and Vishny, Roemer). We briefly review the debate. We argue that a form of market socialism exists and is especially important in education, health care, and health insurance. In these sectors, prices are often set or restricted centrally, while many providers are state-owned, nonprofit, or mutual firms. We argue in favor of applying market socialist principles to health care and to health insurance policy. In particular, we show that these principles imply that community rating of health insurance is a source of major inefficiencies and harmful regulatory pressure. We suggest moving in the market socialist direction – toward marginal cost pricing and therefore away from community rating. The desire for universal or expanded coverage can be fulfilled by explicit, politically transparent subsidies paid to consumers who are both poor and high risk.

Investor-centric strategies for Indian mutual fund industry: inferring from the behavior of individual investors

This research proposes a roadmap for investor-centric strategies to mutual fund firms in India for expanding their client base consists of current and potential investors. Based on the responses of 800 investors collected under a perception survey, using discriminant function analysis, the study works out the sustainable marketing mix variables that impel innovation in product design and distribution for Indian mutual fund industry. The study suggests the revision of prevailing investor strategies profiling with novel products of fewer risks, better governance and regulations, speedy and efficient grievance redressal and professionalism in investor services can impart market dynamism to mutual fund instruments in Indian context. However, the post-investment behavioral paralytics like disposition effect, cognitive dissonance and herd behavior are much critical in determining the strategic effects.

The Causal Effects of Proximity on Investment: Evidence from Flight Introductions

We address fundamental endogeneity issues inherent in the local bias literature by using direct flight introductions as an exogenous shock to the travel time between mutual funds and firms, thereby allowing us to understand the causal effects of proximity on fund investment decisions and performance. We find that a fund invests significantly more in firms that become more proximate due to the introduction of direct flights that reduces the fund’s cost of traveling to the firm, and that these more proximate investments exhibit superior performance. Our findings are robust to the inclusion of a variety of fixed effects and specifications that control for potential confounders such as firm-level shocks, fund-level shocks, and time trends. Collectively, our results indicate that proximity enhances investors' ability to acquire value-relevant information about firms.

Organizational Forms and Internal Capital Market: Evidence from the U.S. Property and Liability Insurance Industry

We examine how organizational forms affect the performance of internal capital markets (ICMs), one of important activities in the business group setting. Specifically, we study the difference in the size and efficiency of ICMs between mutual and stock firms. We measure the size of ICMs using net reinsurance ceded to affiliated companies and evaluate the efficiency of ICMs by investigating the relationship between ICM transfers and investment in lines of high and low profitability. We find that mutual firms have smaller size of ICMs. Mutual firms’ ICMs have lower ability to facilitate investment in highly profitable lines of business. The evidence indicates the heterogeneity of ICM efficiency across different forms of organization in P&L insurance industry.

Competitive Response to Employee Mobility: Evidence From Mutual Fund Companies

Employee mobility has been shown to have competitive implications for firms, yet scant research has examined how firms respond to this event. This study examines how firms cope with the loss of an individual's personal resources as a result of mobility and make strategic actions to reduce the costs incurred by such loss. In this study, I investigate how mutual fund firms that undergo the exit of fund managers increase the production of a team-managed fund as an attempt to reduce the dependency of a fund on a particular individual and increase the sharedness of information resided in individuals. The analysis shows support for this idea. Spatial proximity between the source and recipient firms is further considered as one dimension that yields differential competitive challenges and responses of the source firm. The theoretical contributions of the present study are discussed.

The Challenge and Opportunity of the Indonesian Debt Market

Bond markets play a critical role by assisting governments and firms in mobilizing financing for investment needs; helping governments and firms in obtaining financing directly from the market, thereby subjecting them to the discipline of the market as well as providing healthy competition for the banking system, and thereby reducing concentration of risk in the banking sector; and providing investors with access to diverse types of financial instruments in which to invest both directly and indirectly through mutual funds, pension funds, and insurance firms.

The path to Project Darwin: The evolution of the AMP's organisational structure

Demutualisation became a global trend amongst financial sector firms in the last two decades of the twentieth century. Changes to the organisational foundations of mutual firms represented a shift in operational cultures and have often been viewed as an end point or demise of the co-operative business model. It is the intention of this article to investigate the extent to which this was the case within a major mutual institution, the Australian Mutual Provident, Australia's oldest and largest mutual insurer. The article's key argument is that the concept of mutuality is organic, and that within this organisation it evolved as the structure of the firm became more sophisticated as it developed from a supplier of life insurance products into a sophisticated financial services provider, which ultimately generated internal pressures to demutualise.

Organisational form and industry emergence: Nonprofit and mutual firms in the development of the US personal finance industry

Economic theories of commercial nonprofits and mutuals usually emphasise the advantages of such organisational forms in reducing agency and monitoring costs in markets that suffer from information asymmetries in exchanges between firms and their customers. This article examines the ability of such transaction cost theories to account for historical variations in the ownership and governance of firms in the US personal finance industry between the early nineteenth century and the Great Depression. It focuses, in particular, on mutual savings banks and their role in the development of the intermediated market for savings accounts. While I find some evidence in support of transaction cost theories of organisational form, I also find that entrepreneurial and socio-political factors played crucial roles in the choice of ownership and governance structures; mutual savings banks predominated in the early years of the industry because the form offered entrepreneurial advantages over investor-owned corporations and because in some states they benefitted from regulatory and political advantages that joint-stock companies lacked. Their relative decline by the early twentieth century was the result of increasing competition in the market for savings deposits, the loosening of regulatory barriers to entry, and changes in public policy that reduced the transaction, innovation and regulatory advantages that the mutual savings bank form had once held. The article draws out the theoretical implications for our understanding of the historical role of nonprofit and mutual firms.

Corporate Governance in Spanish Savings Banks - A Historical Perspective

During the previous three decades, mutual financial firms have been experiencing a process of demutualization, and some of the non-for-profit banks have become publicly listed companies. Hence, the persistence of the Spanish Savings Banks constitutes an interesting case study. In line with recent literature, this paper attempts to reach a better understanding of the factors that have contributed to the persistence of these entities in the long run and to the maintenance of a very specific model of corporate governance. Regulatory influences, politics and political institutions have proved to be key elements of a model which has proved capable of delivering successful outcomes in increasingly competitive conditions. Nonetheless, the financial crisis would seem to have exacerbated the stresses and strains within this model and, in combination with the pressure of increasingly globalized markets, the Spanish Savings Banks find themselves in a new scenario.

Institutional Investors and International Diversification in the U.S. Restaurant Industry

ABSTRACT Although U.S. restaurant firms face high risks in diversifying their operations internationally, there are no previous studies that motivate international diversification. If international diversification is risky, then why do restaurant firms go abroad? This study focuses on one potential explanation, namely the institutional investor ownership, to determine if it can explain the internationalization behavior in the restaurant industry. According to previous research, ownership by pressure-sensitive groups (bank and insurance firms) is negatively related to international diversification and ownership by pressure-resistant groups (pension funds, mutual funds, and brokerage firms) is positively related to international diversification. The results for restaurant firms reported in this study partially confirm previous findings. While pension and mutual fund firms support international diversification, pressure from investments by banking firms leads to lower international diversification. Investmen...

Consumer Biases and Firm Ownership

Recent work has explored the implications of behavioral biases among consumers for firm behavior and has documented that profit-maximizing firms exploit consumer biases in the con- tracts they offer consumers. In this paper we show how ownership of the firm by its customers, as well as nonprofit ownership, can be used as commitment devices to avoid offering contracts that exploit consumer biases. In a model of a market in which for-profit investor-owned firms and mutual firms compete, sophisticated consumers who are biased but aware of their biases patronize mutual firms, while unbiased consumers and naive consumers who underestimate their biases patronize for- profit firms. Mutuals serving sophisticates offer high base prices but low prices, while for-profits offer low base prices and high penalty prices, resulting in transfers from naive biased consumers to unbiased consumers. We present evidence from the markets for credit cards, deposit accounts, and mutual funds that supports our theory. Comparing contract terms, we find mutuals do offer higher base prices but lower penalty prices than do for-profits. We also present evidence that customers sort into firms according to their perceptions of their own biases.

Mutual Loan-Guarantee Societies, Small Firms and Banks: An Empirical Investigation (Confidi, Piccole Imprese E Banche: Un'Analisi Empirica)

The paper analyzes the relationships between mutual loan-guarantee societies (MLGS), small firms and banks trying to evaluate the role played by the guarantees granted by MLGSs and by different banks on the availability and the cost of credit. We focus on a sample of firms member of a specific MLGS and we run different econometric exercises in order to identify the effects of the interaction between local firms, banks and MLGS on credit rationing, on the cost of credit, and on the time and the number of guarantees required to obtain a line of credit. Our findings suggest a critical relevance of the MLGS guarantees on the local firms' credit access and conditions. Finally, while the existing evidence points out a reduction in the cost of credit due to MLGSs intermediation, our analysis stresses the heterogeneity of the benefits for local firms, which depends substantially by the guarantees provided by the MLGS and by the reference banks.

Guest Editorial: Oil and Efficient-Market Theory

In 2003, well-known economist Eugene Fama was nominated for the Nobel Prize in economics for work pertaining to his efficient-market hypothesis. Since the 1960s, that hypothesis has been researched, applied, and debated mostly in the context of stock markets. But the theory has measurable applicability to how we go about our daily business in the oil and gas industry. In short, the efficient-market hypothesis states that a free and open market, such as the New York Stock Exchange, adjusts its prices almost instantaneously to all publicly available information. That suggests that one cannot predictably, consistently outperform market returns through fundamental or technical analysis of publicly available information. But what is considered "publicly available information"? Just about everything that happens outside a boardroom and much of what happens inside a boardroom. The market reacts, quickly and efficiently. It may not always be "right," but it will react and continually readjust almost instantaneously. Another part of the hypothesis states that price movements in the market follow a "random walk" pattern (i.e., price movements are random and the best predictor of tomorrow's price is today's price). Taking the hypothesis to its next logical step implies that analysts and active stock investors cannot predictably, consistently outperform market returns by selectively placing bets on particular publicly traded investments. Although this flies against the beliefs and marketing strategies of most mutual funds and Wall Street firms, an extensive number of studies over the years indicate that passive, market-driven investments outperform active, arbitrary investments. Applications to the Oil and Gas Industry Looking at the oil and gas industry, one immediately finds evidence of market efficiency with oil and gas prices. First, if the market were not efficient, firms that did nothing but trade oil and gas futures would be as ubiquitous as independent producers. Moreover, they would perform as well in down markets as in up markets. This would be an easy business to start, as there are almost no barriers to entry. However, firms that do nothing other than trade oil and gas futures are practically nonexistent. One sees few, if any, traders who do nothing other than trade futures paper or buy crude oil in a Cushing, Oklahoma, tank today and sell it in the same Cushing tank tomorrow, for a profit. One may argue that the oil market is not efficient because a few large players, such as some of OPEC's largest producers, have the ability to move prices. And that is true, as well as the fact that insiders in those organizations can take advantage of certain information. But this is true in many industries, particularly those dominated by a few large concerns that everyone else follows. However, having dominant industry players does not mean that the market of buyers and sellers does not incorporate all publicly available information almost instantaneously. The world reacts to OPEC's moves as soon as they are discovered.

Would Mutual Funds Bite the Hand that Feeds Them? Business Ties and Proxy Voting

This paper analyzes conflicts of interest in proxy voting by mutual funds using newly-available data on funds' voting records for 2004. We first examine mutual funds' ties to corporate clients created via pension fund business and their patterns of portfolio ownership. We then link these to proxy votes at specific firms and to overall voting policies for 21 mutual fund families, CalPERS and CREF. Among large fund families, levels of ownership are essentially independent of client relationships between mutual funds and firms, and funds are no more likely to vote with management at client firms than non-clients. At the policy level, however, we find a positive relation between the volume of pension business a fund's parent does and its propensity to vote with management.

Hedge fund managers: Summary and implications of new rules requiring SEC registration

On October 26, 2004, the Securities and Exchange Commission (the “Commission” or the “SEC”) adopted a new rule and related amendments requiring, among other things, that hedge fund managers register with the SEC under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) by February 1, 2006. In this article, we refer to the totality of the recent rulemaking as the “new rules.” The new rules and a lengthy interpretive release (the “Adopting Release”) were made available to the public on December 2, 2004.The new rules only slightly modify the text of the proposed rules published by the SEC on July 20, 2004. We will refer to the July 20, 2004 rules as the “proposed rules.” The proposed rules, which were opposed by two of the five SEC commissioners at the time they were announced, provoked a loud outcry and strong opposition. According to the Adopting Release, the SEC received 161 comment letters from investors, hedge fund managers, mutual fund managers, law firms, and others. Of these, only 36 supported the proposed rules, 83 argued against them, and the remainder presented a neutral view. The objections included “concerns about the costs of compliance under the new rule[s], questions about [SEC] effectiveness in preventing hedge fund fraud, and the potential intrusiveness of [SEC] oversight of hedge fund managers.”

The Benefits of Hybrid Mutual Funds

Historically, mutual funds and hedge funds have differed not only as to the risk and return opportunities that they have offered but also in regard to their investment structure. In recent years, regulatory changes have increased the ability of mutual funds to offer investment strategies that are “hedge fund-like” and include short-selling as well as the introduction of the limited use of leverage. In brief, today there exist an increasing number of mutual funds that offer investment strategies not provided by long only focused stock or bond mutual funds. Since the investment vehicles that these mutual funds employ are not pure traditional mutual funds and yet are restricted from being pure hedge fund in form, they have been classified by some mutual fund data firms (e.g., Morningstar) as hybrid mutual funds. These funds in many cases offer risk and return opportunities closer to that provided by some well-known hedge fund strategies. In this article the performance of various hybrid mutual funds is reported relative to traditional mutual funds as well as their relative performance compared to paired hedge fund investment strategies. The results of the author9s analyses show that hybrid mutual funds provide affordable hedge fund-like mutual funds to small investors. In addition, as part of a larger portfolio, hybrid mutual funds can offer efficient diversification. They give investors exposure to benefits of derivatives instruments which most traditional mutual funds fail to offer.

Ownership Structure Changes in the Insurance Industry: An Analysis of Demutualization

AbstractThis article focuses on the demutualization process and investigates why certain mutuals undergo this organizational structure change. The primary motivation for conversion is access to capital. By statute, mutual firms are limited in their capital‐raising activities while stock firms can attract funds through a variety of stock and debt offerings. By examining the financial characteristics of firms that demutualize, changes in business practices in the years surrounding conversion can be observed. Determinants of the conversion decision are explored through logistic regression. In the years before demutualization, converting property‐liability mutuals exhibit significantly lower surplus‐to‐asset ratios. This capital constraint eases after demutualization. Converting life‐health mutuals hold a significantly lower proportion of liquid assets; in addition, they have a higher proportion of separate accounts under management. This liquidity constraint and increased focus on a higher managerial discretion activity drive the demutualization decision. For both property‐liability and life‐health converting mutuals, support for the access to capital hypothesis is found.