Forthcoming Articles

Actively Keeping Secrets from Creditors: Evidence from the Uniform Trade Secrets Act

Scott B Guernsey, Kose John, and Lubomir P Litov

We find that an increase in a firm’s incentives to use trade secrets to protect its intellectual property results in a more actively managed capital structure. Exploiting U.S. states’ adoption of the Uniform Trade Secrets Act as a positive “shock” in the protection afforded to trade secrets, we find that firms covered by the Act reduce debt levels while increasing investments in intangibles. Additional tests suggest that firms fund these financing and investment activities by issuing more equity. Consistent with an increase in overall intangibility magnifying contracting problems with creditors, we find that covered firms experience higher costs of debt.

Expert Advice: Industry Expertise of M&A Advisors and Acquirer Shareholder Returns

Cong Wang, Fei Xie, and Kuo Zhang

We find that acquirers create higher shareholder returns when advised by investment banks with more experience in the target industry. This finding is stronger when acquirers face more difficulties understanding and evaluating the targets. Further analyses show that these banks help acquirers avoid overpaying for targets and thus capture more of deal synergy rather than making deals generating higher synergy. Our results are robust to controlling for an exhaustive set of determinants of acquirer returns and an identification strategy that exploits exogenous shocks to the supply of investment banks with target industry experience.

Gender Gaps in Venture Capital Performance

Paul A. Gompers, Vladimir Mukharlyamov, Emily Weisburst, and Yuhai Xuan

We explore gender differences in performance in a comprehensive sample of venture capital investments in the United States. Investments by female VCs have significantly lower success rates than investments by their male colleagues controlling for personal characteristics including employment and educational history and portfolio companies’ characteristics. The gender differences in investment outcomes are largely attributable to female VCs receiving less benefit from the track records of their colleagues. Performance differences disappear in older, larger firms and firms with other female investors. This supports the view that formal feedback mechanisms and hierarchies are potentially useful in ameliorating the female performance gap.

Benchmark Discrepancies and Mutual Fund Performance Evaluation

K. J. Martijn Cremers, Jon A. Fulkerson, and Timothy B. Riley

We introduce a new holdings-based procedure to identify whether a mutual fund has a benchmark discrepancy, which we define as a benchmark other than the prospectus benchmark best matching a fund’s investment strategy. We find that funds with a benchmark discrepancy tend to be riskier than their prospectus benchmarks indicate. As a result, the funds on average outperform their prospectus benchmarks — before further risk-adjusting — despite underperforming the benchmarks that best match their portfolios.

Better Kept in the Dark? Portfolio Disclosure and Agency Problems in Mutual Funds

Teodor Dyakov, Jarrad Harford, and Buhui Qiu

We study the agency implications of increased disclosure using a regulatory change in the mutual fund industry as an experimental setting. This quasi-natural experiment mandated more frequent portfolio disclosure, which we show imposes managerial skill re-assessment risks from investors on funds with high relative performance volatility. In turn, this risk translates into greater agency costs to investors. We show that high, relative to low, volatility funds responded to the increased skill re-assessment risk post-regulation with an increase in management fees and a decrease in risk taking. These actions get transmitted to fund investors in the form of inferior net performance.

Foreign-Born Resident Networks and Stock Comovement: When Local Bias Meets Home (Country) Bias

Yun Meng and Christos Pantzalis

Foreign migration flows have important stock market consequences. Foreign-born resident networks within US MSAs are associated with excess return comovement between locally headquartered stocks and ADRs from countries with ties to the MSA through the network of foreign-born residents. This comovement is hardly due to correlated fundamentals and at least partially driven by correlated trading within members of a common investor base consisting of foreign-born residents. Our evidence has implications for both investors and foreign MNCs seeking to reap benefits from cross-listings and is consistent with the notion that foreign-born residents exhibit both local bias and home (country) bias.

Does Industry Timing Ability of Hedge Funds Predict Their Future Performance, Survival, and Fund Flows?

Turan G. Bali, Stephen J. Brown, Mustafa O. Caglayan, and Umut Celiker

This paper investigates hedge funds’ ability to time industry-specific returns and shows that funds’ timing ability in the manufacturing industry improves their future performance, probability of survival, and ability to attract more capital. The results indicate that best industry-timing hedge funds in the manufacturing sector have the highest return exposure to earnings surprises. This, together with persistently sticky earnings surprises, transparent information environment in regards to earnings releases, and large post-earnings-announcement drift in the manufacturing industry, explain to a great extent why best-timing hedge funds can generate significantly larger future returns compared to worst-timing hedge funds.

Network Centrality and Managerial Market Timing Ability

Theodoros Evgeniou, Joel Peress, Theo Vermaelen, and Ling Yue

We document that long-run excess returns following announcements of share buyback authorizations and insider purchases are a U-shape function of firm centrality in the input-output trade flow network. These results conform to a model of investors endowed with a large but finite capacity for analyzing firms. Additional links weaken insiders’ informational advantage in peripheral firms (simple firms whose cash flows depend on few economic links) provided investors’ capacity is large enough, but eventually amplify that advantage in central firms (firms with many links) due to investors’ limited capacity. These findings shed light on the sources of managerial market timing ability.