Forthcoming Articles

Active Technological Similarity and Mutual Fund Performance

Ping McLemore, Richard Sias, Chi Wan, and H. Zafer Yuksel

We examine whether superior understanding of technological innovation is a source of mutual fund managers’ ability to garner positive abnormal returns. Consistent with our hypothesis, the inter-quintile annual net Carhart alpha spread for mutual funds sorted on changes in the technological similarity of their portfolio holdings is 282 basis points. Moreover, because changes in technological similarity are largely orthogonal to other predictors of mutual fund success (e.g., industry concentration, active share, fund R 2, and lag fund alpha), changes in technological similarity can be combined with other measures to help identify the best performing funds.

Deposit-Lending Synergies: Evidence from Chinese Students at US Universities

Jun Yang

This paper exploits an influx of Chinese students to US universities from 2000 through 2018 to study synergies between banks’ deposit-taking and lending activities. Banks that are more recognizable by Chinese students experience higher deposit inflows and increase their local credit supply. This credit supply expansion only occurs in information sensitive credit markets: small business loans and second lien mortgages. Such increase concentrates in non-tradable sectors and is more pronounced at locations where managers have more autonomy. The results indicate that deposits from local consumers convey private information about the local credit market, which helps banks in information-sensitive lending.

Competition and R&D Financing: Evidence from the Biopharmaceutical Industry

Richard T Thakor and Andrew W Lo

The interaction between product market competition, R&D investment, and the financing choices of R&D-intensive firms on the development of innovative products is only partially understood. We hypothesize that as competition increases, R&D-intensive firms will: (1) increase R&D investment relative to existing assets in place; (2) carry more cash; and (3) maintain less net debt. Using the Hatch-Waxman Act as an exogenous shock to competition, we provide causal evidence supporting these hypotheses through a differences-in-differences analysis that exploits differences between the biopharma industry and other industries, and heterogeneity within the biopharma industry. We also explore how these changes affect innovative output.

Identifying the Effect of Stock Indexing: Impetus or Impediment to Arbitrage and Price Discovery?

Byung Hyun Ahn and Panos N. Patatoukas

The rise of stock indexing has raised concerns that index investing impedes arbitrage and degrades price discovery. This paper uses Russell’s reconstitution to identify the causal effect of index investing on information arbitrage and price discovery. While index investing has no discernible effect on the ability of arbitrageurs to trade and impound news into the prices of large- and mid-cap stocks, we find that index investing increases the speed of price adjustment to news for micro-cap stocks. Our causal evidence identifies the relaxation of arbitrage constraints as a mechanism through which indexing facilitates informed trading for more arbitrage-constrained micro-cap stocks.

Financial Development and Micro-Entrepreneurship

Rajeev Dehejia and Nandini Gupta

Does financial development facilitate micro-entrepreneurship? Using randomized surveys of over 1 million Indian households and bank branch locations pre-determined by government policy, we find that access to finance shifts workers from informal micro-entrepreneurship into formal employment. Financial access reduces likelihood of being self-employed, but benefits micro-enterprises with employees, and formal firms. Using data on 400,000 firms, we find that in districts with more banks, firms have higher loans, productivity, employment, and wages than firms in less banked districts. This evidence suggests a labor market mechanism by which financial development facilitates growth: by shifting workers from unproductive micro-entrepreneurship into productive employment.

Liability Structure and Risk-Taking: Evidence from the Money Market Fund Industry

Ramin P. Baghai, Mariassunta Giannetti, and Ivika Jäger

How does the structure of financial intermediaries’ liabilities affect their asset holdings? We investigate the consequences of the 2014 money market fund (MMF) reform, which imposed redemption gates and liquidity fees on prime MMFs and forced prime funds marketed to institutional investors to switch from constant to floating net asset value. These changes made prime MMFs’ liabilities less money-like. As a consequence, the affected MMFs experienced an increase in the flow-performance sensitivity and started taking more risk. In addition, the total funding provided by MMFs to the corporate sector, and especially to safer issuers, has decreased.

Do Alpha Males Deliver Alpha? Facial Width-to-Height Ratio and Hedge Funds

Yan Lu and Melvyn Teo

An abundance of evidence relates masculine traits in males to facial width-to-height ratio (fWHR). We show that hedge funds operated by high-fWHR managers underperform those operated by low-fWHR managers, bear greater downside risk, are more susceptible to fire sales, and fail more often. High-fWHR managers compensate for their underperformance by marketing their funds more aggressively, thereby garnering higher flows and fee revenues. By exploiting major personal events that shape testosterone, namely marriage and fatherhood, we trace the biological mechanism underlying the relation between fWHR and investment performance to circulating testosterone. Our findings are robust and extend to equity mutual funds.

Eyes on the Prize: Do Industry Tournament Incentives Shape the Structure of Executive Compensation?

Emdad Islam, Lubna Rahman, Rik Sen, and Jason Zein

We investigate whether external industry tournament incentives influence the design of executive compensation contracts. Using staggered negative mobility shocks as exogenous disruptions to tournament incentives, we show that firms treated by these shocks act to restore their executives’ diminished implicit risk-taking incentives by increasing compensation vega. On average, post-shock compensation vegas increase by about 10%. These effects are considerably larger for treated executives with strong tournament incentives and high ex-ante mobility. Mobility shocks have no impact on compensation delta or total pay. Our results shed light on how explicit risk-taking incentives are optimized with respect to executive career concerns.