Mutual Fund Ownership Research Articles

Mutual fund ownership and sponsor background: effect on performance and risk strategy

The study aims to analyse whether performance of mutual fund could be attributed to differential in information access and organisation culture which we propose could exist due to ownership pattern and background of sponsor. By utilising the data on Indian equity mutual funds with growth objective for the period 2005-2013, we have compared performance and risk strategy of mutual funds having different ownership and sponsor background by applying portfolio approach and regression method. The results provided that performance and risk strategy have been significantly different among mutual funds with different type of ownership and sponsor background. In particular foreign-owned mutual funds performed significantly better than domestic mutual funds. The foreign mutual funds have not been mere naive traders in Indian stock market. The findings do not support information bias theory in the context of Indian stock market and better performance of foreign funds could be due to cultural differences based on ownership and sponsor background.

Fraud, Market Reaction, and the Role of Institutional Investors in Chinese Listed Firms

The extent and type of financial fraud committed by listed firms in China, stock market reaction to the detection and announcement of fraud, and the association between institutional ownership and financial fraud are the subjects of this article. Using fraud data from the period between 2001 and 2011, the authors find wide occurrences of fraud and a strong negative market reaction on the announcement date, particularly in cases of serious fraud. Fraud is more likely to occur at firms that have a smaller proportion of independent directors and at poorly performing firms. Firms with higher mutual fund ownership subsequently have fewer incidences of fraud. Our results reports by the authors indicate that ownership by independent institutions, such as mutual funds, serves as an effective monitoring mechanism, deterring fraud and enhancing corporate governance in Chinese capital markets.

Hedge Fund Ownership, Board Composition and Dividend Policy in the Telecommunications Industry

This paper examines the impact of hedge fund ownership, mutual fund ownership, board composition and large block ownership on the dividend policy of telecommunications firms. The paper is intended to test the agency cost hypothesis for dividends, in which dividends serve as a substitute control mechanism in circumstances in which shareholder control has been attenuated. The evidence suggests that hedge fund ownership serves as a substitute for dividends as a corporate control mechanism to alleviate agency problems. However, the same case cannot be made for mutual fund ownership. The evidence also suggests that board independence increases the likelihood and the magnitude of a dividend payout. Furthermore, the results also indicate that the joint presence of independent boards and large shareholdings reduces the likelihood of a dividend payment. The latter two results suggest that greater independent board representation provides an effective medium for shareholders to extract dividends as well as a complement to top shareholder concentration in relieving agency costs. Overall, the results provide ample support for an agency-theoretic explanation of dividends.

Forecasting Crashes: Correlated Fund Flows and the Skewness in Stock Returns

This paper uses the correlation of money flow among mutual funds to forecast the skewness of stock returns. We show that asset returns are highly negatively skewed when their mutual fund owners experience correlated liquidity shocks. In addition, stocks with high mutual fund ownership are more “crash prone”, whereas the returns of stocks with concentrated ownership tend to display more positive skewness.

Does auditor choice matter to foreign investors? Evidence from foreign mutual funds worldwide

This study explores whether a firm’s auditor choice affects its ability to access foreign equity capital. Using the equity holdings of 35,665 foreign mutual funds from 30 countries for the period 1998–2009, we find evidence that appointing a Big 4 auditor is associated with the increased level of foreign mutual fund ownership in firms. Our results are robust when conditioned on firm-level information asymmetries, country-level information disclosure quality, and when employing the Enron–Andersen fiasco as the natural experiment. Furthermore, appointing Big 4 auditors is particularly important for firms to attract foreign capital during the 2008 global financial crisis.

The demand-side explanation for commonality in liquidity: The role of institutional ownership in the Taiwan Stock Exchange

In a sample of the Taiwan Stock Exchange (TWSE), this paper documents that stocks with greater liquidity commonality are related to higher aggregate ownership by qualified foreign institutional investors (QFIIs), mutual funds, and securities dealers. This positive ownership–commonality relation is more pronounced during market declines. Decomposing data for each of the three institutions reveals that ownership by securities dealers overshadows ownership by QFIIs or mutual funds in driving liquidity commonality on the TWSE. Moreover, the positive relation between commonality and ownership by QFIIs or securities dealers is stronger for large-cap stocks, whereas the positive effect of mutual fund ownership on commonality is more evident among small-cap stocks. These findings endorse the size effect, habitat-based explanations, and style-based explanations of liquidity commonality. Overall, this study bolsters demand-side explanations of commonality on the TWSE by finding that correlated trading among institutions generates co-movement in liquidity.

Does mutual fund ownership affect financial reporting quality for Chinese privately-owned enterprises?

This paper examines the role of mutual funds in enhancing financial reporting quality in China. Mutual funds are more sophisticated and influential than individual investors. Therefore, they are expected to be more effective at preventing executives from expropriating investors and manipulating earnings as a cover-up, which in turn would reduce the incidence of modified audit opinions (MAOs). Our results, based on the Chinese listed firms from 2003 to 2008, confirm this prediction. More importantly, the effects of mutual fund ownership in reducing the incidence of MAOs are greater among privately owned enterprises (POEs), and especially those with higher growth. This is because POEs rely more heavily on the capital market for financing than do state-owned enterprises (SOEs), and because growth opportunities need to be funded by additional external capital. This finding implies that mutual funds form an important part of the external governance mechanism in emerging countries, but this effect is moderated by state control and ownership.

Does Mutual Fund Ownership Affect Corporate Transparency of Chinese Privately-Owned Enterprise?

This paper examines the role of mutual funds in enhancing financial reporting quality in China. Mutual funds are more sophisticated and influential than individual investors. Therefore, they are expected to be more effective at preventing executives from expropriating investors and manipulating earnings as a cover-up, which in turn would reduce the incidence of modified audit opinions (MAOs). Our results, based on the Chinese listed firms from 2003 to 2008, confirm this prediction. More importantly, the effects of mutual fund ownership in reducing the incidence of MAOs are greater among privately owned enterprises (POEs), and especially those with higher growth. This is because POEs rely more heavily on the capital market for financing than do state-owned enterprises (SOEs), and because growth opportunities need to be funded by additional external capital. This finding implies that mutual funds form an important part of the external governance mechanism in emerging countries, but this effect is moderated by state control and ownership.

Information asymmetry, mutual funds and earnings management: Evidence from China

This paper investigates how information asymmetry and mutual fund ownership affect listed companies’ earnings management. We show that (1) reducing information asymmetry improves firms’ earnings management behavior; (2) relative to short-term mutual funds, long-term mutual funds promote earnings quality by adopting a monitoring role; and (3) by dividing firms into high/low information asymmetry groups, we find that the information environment significantly increases the effect of long-term mutual funds on firms’ earnings management. In this paper, we provide new evidence for the role that institutional investors play in a typical emerging capital market. Our results have clear policy implications: to increase earnings quality, it is essential to improve information transparency and develop long-term institutional investors.

Fund ownership and stock price informativeness of Chinese listed firms

We examine the impact of mutual fund ownership on stock price informativeness in China. Existing evidence shows that stock price informativeness is low in China, and attributes this to firms’ lack of disclosure incentives under the weak investor protection institutional environment. Mutual funds are more sophisticated and influential than individual investors to monitor firms, and thus serve as an external governance mechanism to improve corporate transparency. However, the impact of mutual funds in China can also be moderated by state ownership of listed firms, which reduces firms’ dependence on outside investors for capital. Indeed, we find that mutual fund ownership is positively related to share price informativeness, but this effect is less pronounced among state-controlled firms. The main policy implication from our findings is that mutual funds contribute to the corporate information environment of emerging economies but further privatization of listed firms would be needed to realize greater benefit.

Minority Shareholders' Control Rights and the Quality of Corporate Decisions in Weak Investor Protection Countries: A Natural Experiment from China

ABSTRACT Using a 2004 Chinese securities regulation that requires equity offering proposals to obtain the separate approval of voting minority shareholders, we examine whether giving minority shareholders increased control over corporate decisions helps to reduce value-decreasing corporate decisions for firms domiciled in weak investor protection countries. We find that the regulation deters management from submitting value-decreasing equity offering proposals in firms with higher mutual fund ownership. There is also weak evidence that minority shareholders are more likely to veto value-decreasing equity offering proposals in firms with higher mutual fund ownership in the post-regulation period. Overall, our evidence suggests that in weak investor protection countries, the effect of granting minority shareholders increased control over corporate decisions on the quality of corporate decisions depends on the composition of minority shareholders. JEL Classifications: G32; G34; G38

Fraud, Market Reaction, and Role of Institutional Investors in Chinese Listed Firms

We examine the extent and type of financial fraud committed by listed firms in China, stock market reaction to the detection and announcement of fraud, the characteristics of firms committing fraud, and the association between institutional ownership and financial fraud. One of our objectives is to study the monitoring role of different types of institutional investors, such as mutual funds, pension funds and insurance companies. Using fraud data from the Chinese Securities Regulatory Commission between 2001 and 2011, we find wide occurrences of fraud and a strong negative market reaction on the announcement date, particularly in cases of serious fraud. Fraud is more likely to take place at firms that have a smaller proportion of independent directors and at poorly performing firms. We find firms with higher mutual fund ownership subsequently have fewer incidences of fraud. We do not find any association between ownership by grey financial institutions, such as insurance companies and pension funds that are likely to have business ties with firms, and future corporate fraud. Our results are consistent with the hypothesis that ownership by independent

Educational Networks, Mutual Fund Voting Patterns, and CEO Compensation

Mutual funds whose managers are in the same educational network as the firm's CEO are more likely to vote against shareholder-initiated proposals to limit executive compensation than out-of-network funds are. This voting propensity is stronger when voting among the funds in a family is not unanimous. Furthermore, CEOs of firms who have relatively high levels of educationally connected mutual fund ownership have higher levels of compensation than their unconnected counterparts. This aspect of executive compensation is related to both the abnormal trading performance of the connected investors in the firm and the perceived quality of firm management by the connected investors. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Educational Networks, Mutual Fund Voting Patterns, and CEO Compensation

Mutual funds whose managers are in the same educational network as the firm’s CEO are more likely to vote against shareholder-initiated proposals to limit executive compensation than out-of-network funds. This voting propensity is stronger when voting among the funds in a family is not unanimous. Furthermore, CEOs of firms with relatively high levels of educationally connected mutual fund ownership have higher levels of compensation than their unconnected counterparts. This aspect of executive compensation is related to both the abnormal trading performance of the connected investors in the firm and the perceived quality of firm management by the connected investors.

Mutual Fund Ownership, Firm Specific Information, and Firm Performance: Evidence from China

This paper shows empirically that the positive association between mutual fund ownership and firm value in China is mainly driven by the informed trading of mutual funds. Utilizing the unique short term feature of mutual fund holdings for the period from 2001 to 2010, we provide an informational link between a decomposed component of market-to-book ratio (firm specific valuation component) and mutual fund holdings. Specifically, we find that firms with a higher level of mutual fund ownership are associated with a higher specific value. Moreover, the positive association between the specific value of a firm and mutual fund ownership is more pronounced in firms with a higher level of specific information (or higher idiosyncratic volatility). We argue that in an emerging market such as China, mutual funds help to improve market efficiency by incorporating private information into stock prices through their informed trading although they are really a lack of incentive to monitor management.

Portfolio Preferences Across Markets: Evidence from Mutual Fund Ownership

This paper is about evaluating and comparing the portfolio preferences of domestic and foreign mutual funds in developed and emerging markets over the period 1998-2007. We find that foreign and domestic mutual funds have some different preferences toward firm characteristics and firm’s information enviroments, and economic development affects the preferences for both types of funds. A country’s characteristics and institutions also influence mutual fund investment decisions when fund managers from their portfolio holdings. Results further show that foreign and domestic mutual funds play a monitoring role in their portfolio firms, but foreign mutual funds cannot monitor firms effectively in emerging markets.

Early Life Conditions and Financial Risk-Taking in Older Age

Using life-history survey data from eleven European countries, we investigate whether childhood conditions, such as socioeconomic status, cognitive abilities and health problems influence portfolio choice and risk attitudes later in life. After controlling for the corresponding conditions in adulthood, we find that superior cognitive skills in childhood (especially mathematical abilities) are positively associated with stock and mutual fund ownership. Childhood socioeconomic status, as indicated by the number of rooms and by having at least some books in the house during childhood, is also positively associated with the ownership of stocks, mutual funds and individual retirement accounts, as well as with the willingness to take financial risks. On the other hand, less risky assets like bonds are not affected by early childhood conditions. We find only weak effects of childhood health problems on portfolio choice in adulthood. Finally, favorable childhood conditions affect the transition in and out of risky asset ownership, both by making divesting less likely and by facilitating investing (i.e., transitioning from non-ownership to ownership).

Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices

This paper documents that mutual funds “herd” (trade together) into stocks with consensus sell-side analyst upgrades, and herd out of stocks with consensus downgrades. This influence of analyst revisions on fund herding is stronger for downgrades, and among managers with greater career concerns. These findings indicate that career-concerned managers are incentivized to follow analyst information, and have a greater tendency to herd on negative stock information, given the greater reputational and litigation risk of holding losing stocks. Further, during the more recent period (when aggregate mutual fund equity ownership is significantly higher), stocks traded by career-concerned herds of fund managers in response to analyst revisions experience a significant same-quarter price impact, followed by a sharp subsequent price reversal. Our evidence suggests that analyst recommendation revisions induce herding by career-concerned fund managers, and that this type of trading has become price-destabilizing with the increasing level of mutual fund ownership of stocks.

When Some Investors Head for the Exit

We develop a measure of binding short-sales constraints in equity markets derived from Chen, Hong, and Stein (2002)'s breadth of mutual fund ownership. We show that when the exit rate, the fraction of investors that held a stock in the previous quarter and that exit that stock this quarter, is high, short-sales constraints are more tightly binding and price is high relative to fundamentals. In contrast, entry of investors that have not previously owned the stock is associated with more not less over-pricing. The exit rate better captures the disagreement distribution of investors in similar fund styles actively evaluating a stock. Using equity funds and for the fi rst time hedge funds, we show that stocks with high exit rates consistently under-perform the market throughout the entire 1980-2008 sample.

The Role of Mutual Funds in Deterring Corporate Fraud in China

Since the 1990s there has been a surge in the mutual fund industry across the world. Mutual funds offer individual investors both the diversification of investment risk and the expertise to monitor corporate decisions. We find the effect of mutual fund ownership in reducing corporate fraud activities among listed firms in China. This confirms that fund managers utilize share prices to discipline firms for misdemeanors. Additional tests reveal that open-end funds reduce their ownership after firms are penalized by the regulatory authorities for corporate fraud. We also observe that this effect is more pronounced among non-state-owned enterprises (NSOEs) than state-owned enterprises (SOEs). This implies the negative side of the government support to SOEs. Since state-controlled listed firms receive government financial support, they are less dependent on the capital market and therefore more insulated from monitoring by external stakeholders. Thus, although managerial political connections could benefit firms in a transitional economy, they incur agency costs for minority shareholders.