Portfolio Firms Research Articles

Mutual Fund Liquidity Management, Stock Liquidity, and Corporate Disclosure

This study presents novel evidence that mutual fund liquidity management affects stock liquidity. Exploiting a proposal by the U.S. Securities and Exchange Commission (SEC) as an exogenous shock to mutual fund liquidity management, I find that mutual fund liquidity management improves stock liquidity of firms in mutual fund portfolios. This improvement is more pronounced when mutual funds have stronger incentives to improve portfolio liquidity and more resources to influence firms and when portfolio firms have lower stock liquidity prior to the SEC proposal. Consistent with mutual funds influencing portfolio firms to be more transparent, I further show that improving disclosure among portfolio firms is one mechanism through which stock liquidity is improved. Overall, the results indicate that liquidity management at the fund level has important implications for stock liquidity and information disclosure of portfolio firms.

The Benefits of Access: Evidence from Private Meetings with Portfolio Firms

We analyze the monitoring efforts of a large active asset manager that involve high-level private meetings with portfolio firms that are unobservable to outsiders. Our analysis reveals the inner workings of the asset management organization based on detailed records of contacts with executives and board members of portfolio firms, internal analyst recommendations, voting decisions, and daily fund-level stock holdings. Private meetings generate pronounced trading patterns, with fund managers trading on and around meeting days and votes. Our results show that engagement with target firms generates insights and information advantages, increases trading and is associated with significant abnormal returns.

Investors’ Aspirations toward Social Impact: A Portfolio-Based Analysis

In the last ten years, we have witnessed a proliferation of investors claiming blended value strat-egies, i.e., pursuing both economic and social returns in their investments. Aside from this rush for self-selecting in a blended value finance context, we still do not know to what extent the investors’ claims actually reflect investment decisions. Evidence suggests that, in some cases, such investors tend to maximize the social performance over the financial performance; in some others, the effect is reverted, but literature currently lacks studies aligning the analysis of the investment decisions with the investment portfolios. Yet, it is still unclear whether blended value investment decisions are enacted as a result of investors’ deliberate strategies and what influences this relationship. In this paper we tackle this issue, analyzing the extent to which investors’ finance firms pursuing goals aligned with their strategic aspirations. Specifically, adopting a Fractional Logistic Re-gression model, we test the effect of investors’ aspirations toward social impact on the extent to which their investees (i.e., the portfolio of firms in which they invest) pursue social returns. Results suggest the existence of a positive and significant investor–portfolio alignment effect (i.e., the higher the investors’ aspirations toward social impact, the higher the number of investees with higher social aspirations). Yet, this effect is influenced by contingencies at both investor and port-folio levels. Investors with strong aspirations toward social impact that: (i) invest in countries with high levels of social inequality, and (ii) are located in countries that support social progress and maximize, in their portfolios, the presence of businesses pursuing social impact. We discuss implications for future researchers, policymakers and practitioners.

Two Different Exits: Prediction and Performance of Stocks that are About to Stop Trading

Mergers and drops are two of the most common reasons for firms to stop trading in the market. Both tend to be younger than the average and more likely to be growth stocks. Their past returns are very different -- firms that are about to drop have negative and volatile returns, while firms that merge have had high returns of lower-than-average volatility. Using a standard logit hazard model, we predict drops and mergers at short horizons and calculate predicted probabilities of these events. Portfolios of firms that are about to merge have positive Fama and French 3-factor and 5-factor alphas, though this is partly driven by positive momentum. Firms that have a high probability of dropping have negative alphas that are close to -2\% to -3\% per month. Results are robust to predicting returns using Fama and MacBeth regressions.

The CSR Supply Chain Risk Management Hypothesis Evidence from the Suez Canal Ever Given Obstruction

We investigate whether Corporate Social Responsibility (CSR) activities help reduce supply chain disruption risks thanks to supply source diversification strategy-building. The Suez Canal obstruction in March 2021 by the Ever Given container ship provides the empirical setup to identify firms exposed to supply management shocks. The intensity of firms’ CSR activities is recorded in the Refinitiv Environmental, Social and Governance (ESG) database for a sample of 299 European listed firms. During the first three days of the Ever Given grounding, the portfolio of firms in the lowest quantile of ESG scores experienced negative and statistically significant Cumulative Abnormal Returns (CARs), in contrast with a portfolio made up of firms in the corresponding highest quintile. This result is consistent with CSR-active firms being less exposed to supply chain disruption risks. Robustness checks (day-by-day abnormal returns, disaggregated ESG scores, sector-specific analyses) and cross-sectional regressions controlling for confounding effects (firm size, valuation, and stock volatility) bring additional support to this interpretation.

Do ESG Funds Make Stakeholder-Friendly Investments?

Investment funds that claim to focus on socially responsible stocks have proliferated in recent times. In this paper, we verify whether ESG mutual funds actually invest in firms that have stakeholder-friendly track records. Using a comprehensive sample of self-labelled ESG mutual funds in the US from 2010 to 2018, we find that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years. Relative to other funds offered by the same asset managers in the same years, ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue. Despite these findings, ESG funds hold portfolio firms with higher average ESG scores; we show that ESG scores are correlated with the quantity of voluntary ESG-related disclosures but not with firms’ compliance records or actual levels of carbon emissions. Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year and charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders.

Incentive Realignment: Mutual Funds’ Influence on Executive Compensation Contracts

Using a regulation that increased portfolio disclosure frequency of US mutual funds as an exogenous shock shortening funds’ investment horizon, we find that affected funds influence portfolio firms to reduce the pay duration of their executives to incentivize them to also have shorter investment horizon. We show that funds affect this change through both voice and exit channels, i.e., voting on compensation-related issues and divesting from portfolio firms. Cross-sectional tests corroborate these findings to reveal more pronounced effects when fund managers have stronger career incentives and are less distracted, and when funds are less concerned about free rider problems and share ownership with potentially supportive other short-term oriented investors.

Spillover Effects of Mandatory Portfolio Disclosures on Corporate Investment

This paper examines the effect of mandatory portfolio disclosure by actively managed investment funds on investee firms’ investment decisions. Mandatory portfolio disclosures can reduce fund managers’ incentive to collect and trade on private information, and thereby reduce the stock price informativeness of their portfolio firms. Using a difference-in-differences design around the May 2004 SEC regulation requiring more frequent disclosure, we find that investment sensitivity to stock prices declines for firms with significant ownership by actively managed funds affected by the regulation. Results from cross-sectional tests indicate that the decline in investment-price sensitivity is concentrated among firms owned by funds with larger expected proprietary costs and for firms more likely to learn from the information in price. We conduct numerous placebo and robustness tests to mitigate endogeneity concerns. Overall, our results suggest that portfolio disclosure requirements have spillover effects on corporate investment by lowering managers’ opportunities to learn from price.

Nonrandom Survival and Long-Run Performance of IPO Firms

I find IPO firm survival is not random: better-performing IPOs are more likely to survive. Some unlucky IPO firms are delisted early after experiencing negative idiosyncratic shocks. These IPO firms’ average observed performance understates their true performance, creating the reverse survivorship bias. Because of non-random survival, seasoned firms have greater expected returns than IPO firms, creating the survivorship bias. Buy-and-hold abnormal returns relative to matched seasoned firms underestimate IPO firm performance because of the two biases. Alpha of the calendar time portfolio of IPO firms, unaffected by the biases, offers an unbiased measure of the average IPO firm alpha.

Relative Performance Evaluation and the Peer Group Opportunity Set

We develop an algorithm that mimics the relative performance evaluation (“RPE”) peer selection process used for CEOs’ incentive plans. Our algorithm constructs the portfolio of peer firms that exhibits the highest in-sample stock performance correlation with the focal firm, which we then use as a counterfactual to better understand firms’ actual RPE choices. We find that most firms use RPE in a manner consistent with optimal risk-sharing; firms are more likely to use RPE when a viable peer group is available, and they construct peer groups that are about as effective as possible at shielding CEOs from outcome risk. However, some firms choose not to use RPE even when an effective peer group is available; non-reliance on RPE in these cases appears to be related to competitive sabotage concerns. Other firms choose to use RPE, but benchmark against a peer group that is not effective from a risk-sharing perspective; reliance on RPE in these cases appears to be related to rent-extraction. Collectively, our study improves the understanding of firms’ ex ante ability to construct an effective peer group, and thereby sheds new light on why firms do—and perhaps more importantly, why some firms do not—use relative performance evaluation in their CEOs’ incentive plans.

Does a mutual fund's exposure to pollution influence its environmental engagements?

This paper studies the relationship between mutual fund management's direct experience with air pollution and the fund's engagements with portfolio companies on environmental issues. We find that higher air pollution in a mutual fund's headquarter county increases the propensity of the fund to vote in support of shareholders' environmental proposals and to liquidate its holdings of portfolio firms with lower environmental ratings. We also find that greater air pollution exposure of a mutual fund predicts better environmental performance at its portfolio companies. To establish causality, we use elevated air pollution produced by large wildfires in a mutual fund's headquarter county as an instrument and identify similar effects on the outcome variables. These results suggest that a mutual fund's direct exposure to pollution can inform its environmental engagements at its portfolio companies.

Rush to Raise: Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing?

We provide evidence that venture capitalists (VCs) strategically enhance their current funds’ interim performance around new fundraising events. Using novel investment-round-level pricing data, we document that, immediately prior to raising another fund, VCs tend to invest in follow-on financing rounds of their existing portfolio firms at abnormally high step-ups in valuation, relative to subsequent follow-on rounds at the same firms. This pattern cannot be explained by deal and investor characteristics, and strengthens when multiple VCs in the syndicate concurrently raise new funds. Investing at high round prices translates into higher quarterly portfolio IRRs reported at the fund level. Overall, our results question the veracity of portfolio valuations based on investment-round pricing, especially when the VC is under the pressure to raise a new fund.

Walk the Talk: ESG Mutual Fund Voting on Shareholder Proposals

We document evidence that mutual funds designated as “Sustainable Investment Overall” by Morningstar (which we classify as ESG mutual funds) are no more likely than other mutual funds to support shareholder proposals. We find, however, that ESG mutual funds are more likely than non-ESG mutual funds to support environmental and social (ES) shareholder proposals. We also find that ESG mutual fund support for ES proposals is more pronounced in ESG index funds than in ESG active funds and in the ESG funds of small rather than large fund families. These results imply that mutual fund investment constraints and access to investor demand may shape how ESG mutual funds influence portfolio firms’ environmental and social action choices.

Once Bitten, Twice Shy: Learning From Corporate Fraud and Corporate Governance Spillovers

This paper finds that investors learn from their experience with corporate fraud and financial misconduct and modify their investment behavior to avoid suspicious firms and increase corporate governance efforts. More specifically, mutual funds that experienced corporate fraud at one of their portfolio firms subsequently chose firms with lower probabilities of fraud and financial misconduct, compared to otherwise similar funds that did not experience any corporate malfeasance incidents. Furthermore, mutual funds that experienced corporate fraud intensify their corporate governance activities and vote significantly more against management at other firms in their portfolios, compared to the voting behavior at the same firms by otherwise similar funds but that did not experience any fraud, especially on issues related to director election, audit, and financial statement. I find that fraud-experienced investors are significantly less likely to vote for problematic directors. Finally, I find that firms held by more fraud-experienced investors observe a significant drop in the propensity to get an accounting fraud sanction in subsequent years. Taken together, my results show that learning and experience play a critical role in corporate governance spillovers, fraud detection, and deterrence.

VaR and market value of Fintech companies: an analysis and evidence from global data

PurposeThis study aims at determining the portfolio value at risk (VAR) and market value of Fintech firms and compare it with their counterparts.Design/methodology/approachBy using on a dataset from 46 countries between 2009 and 2018, the authors use five measures of VaR to investigate their empirical dynamics in relation with the market value of Fintech and non-Fintech companies.FindingsThe empirical results indicate that Fintech firms' portfolios have a higher financial risk and a higher market value in comparison to non-fintech firms' portfolios. Furthermore, the authors also report that the Fintech firm portfolios experience more financial risk regardless of the holding period as long-term (one year) or short-term (quarter).Research limitations/implicationsThere are some limitations in this research. This research does not segregate Fintech firms into their different types of services, such as direct financial investment services, loan provision services, insurance services (InsurTech), etc. The authors only aggregate the Fintech firms by country and region. Future research may consider analysing Fintech firms by differentiating the kind of financial services they offerPractical implicationsGiven the importance of their market value, the results imply that Fintech companies might contribute significantly to financial fluctuations in case of large variations of the market. In terms of policy recommendation, this observation requires a particular attention from the regulatory bodies who need to find the best economic balance between promoting innovation/financial technology and regulating the Fintech companies.Originality/valueThis paper is the first study clarifying the relation of financial risk and market value for the Fintech firms, using the large enough database to obtain significant results. This article implies that Fintech companies require a robust risk management framework

Do working capital management practices influence investment and financing patterns of firms?

PurposeThe present study aims to investigate the impact of working capital management (WCM) practices on the investment and financing patterns of listed nonfinancial companies in Pakistan for a span of 10 years.Design/methodology/approachThe study is based on secondary financial data of 354 listed nonfinancial Pakistani firms during the period of 2005–2014. The two-step generalized method of moment (GMM) regression estimation technique is employed to ensure the robustness of results.FindingsEmpirical testing reveals that: excessive funds tied up in working capital have a negative impact on the investment portfolio of sample firms. Besides, a negative relationship between change in fixed assets and excess net working capital posits that, eventually, firms use idle resources tied up in short-lived assets to boost their investment activities. Furthermore, larger working capital levels were associated with higher leverage ratio which indicates that firms with inefficient WCM policies have to rely heavily on long-term debt to meet their short-term financing requirements. Additional results indicate that firms that take more time to sell inventory and convert receivables to cash, make more use of debt. Results of cash management models illustrate that cash-rich firms have lower leverage levels which signal the strong financial health and internal revenue generation capability of such firms.Originality/valueThere is a dearth of empirical studies that examine the implications of WCM decisions on a firm's capital structure. Besides, these studies are only confined to how a WCM policy influences the long-term investment activities of a firm. The research contributes to the extant literature by empirically revealing a link between the WCM practices and the firm's long-range investment and financing patterns. Hence, financial managers shall account for the impact of their short-term financial management decisions on the capital structure of the firm.

What Is the Impact of Mutual Funds' ESG Preferences on Portfolio Firms?

Mutual funds must publish policies announcing how they generally vote on the different ballot items at the shareholder meetings of their portfolio firms. I manually collect 17,000 of these policies for a sample of 29 of the largest U.S. mutual fund families over 2006-2018. I find that voting policies are a major predictor of funds' voting behavior. Exploiting staggered changes in funds' voting policies, I show that investee companies adopt their mutual fund shareholders' preferred governance provisions. This adoption is the result of mutual fund shareholders' active voting. Announced voting policies also stimulate strategic proposal submissions by non-mutual fund shareholders.

The relationship of different measures' information content of company size in determining abnormal stock returns companies listed on Tehran Stock Exchange

Objective: The relation of information content of organization different criteria on abnormal stock returns of companies within Tehran stock exchange is studied in this paper. Methodology: The scientific purpose of this study is to review the impact of accounting fundamental variables on explaining the value and returns of firms and its applicable purpose is to review the effective factors on stock price in order to help liberal analyzers to choose appropriate stocks for investment through providing effective factors on abnormal stock returns within Tehran stock exchange. Results: Research data are the combination of financial variables of 120 firms participating in Tehran stock exchange in the period of recent 10 years (2004 – 2014). Research methodology, data method was panel and hypotheses test was through Fisher. Conclusion: Obtained results indicate negative and significant relation of future abnormal returns of firms with the asset value and the value of total asset market. In another analysis it is indicated that in case of considering market value to two variables of asset value and market value of total assets, the strength of model explanation and value relation will not be changed. In addition, abnormal stock returns in portfolio of firms with low and high total asset value and firms portfolio with high and low total asset market value are different.

Are the risk attitudes of professional investors affected by personal catastrophic experiences?

AbstractWe adopt a novel empirical approach to show that the risk attitudes of professional investors are affected by their catastrophic experiences—even for catastrophes without any meaningful economic impact on these investors or their portfolio firms. We study the portfolio risk of U.S.‐based mutual funds that invest outside the United States before and after fund managers personally experience severe natural disasters. Using a difference‐in‐differences approach, we compare managers in disaster versus nondisaster counties matched on prior disaster probability and fund characteristics. We find that monthly fund return volatility decreases by roughly 60 basis points in year +1 and the effect disappears by year +3. Systematic risk drives the results. Additional analyses do not support wealth effects (using disasters with no property damage) or managerial agency, skill, and catering explanations.

Governance by One-Lot Shares

How to protect public investors from expropriation by controlling shareholders in firms with concentrated ownership structures continues to be a challenge for many markets including the U.S. In this paper, we examine the effect of having a token minority activist shareholder on improving investor protection, exploiting a recent, novel policy experiment in China. The experiment, conducted by the China Securities Regulatory Commission, created an institutional investor which holds 100 shares in pilot portfolio firms incorporated in three designated regions and exercises oversight in the capacity of a not-for-profit quasi-official shareholder. We find that relative to control firms, independent directors of the pilot firms are more likely to cast dissenting votes during the pilot. Improved monitoring by independent directors and activism by the token shareholder result in a reduction in tunneling related-party transactions and earnings management and an increase in the quality of mergers and acquisitions. Overall, our results shed light on a new mechanism for enhancing the protection of minority shareholders.