Can Individual Investors Beat the Market?

We document strong persistence in the performance of trades of individual investors. Investors classified in the top 10 percent place other trades that on average earn excess returns of 15 basis points per day. A rolling-forward strategy of going long firms purchased by previously successful investors and shorting firms purchased by previously unsuccessful investors results in excess returns of 5 basis points per day. These returns are not confined to small stocks nor to stocks in which the investors are likely to have inside information. Our results suggest that skillful individual investors exploit market inefficiencies to earn abnormal profits, above and beyond any profits available from well-known strategies based upon size, value, or momentum.Individual Investors, Market Efficiency, Performance Persistence

Do Powerful Politicians Cause Corporate Downsizing?

This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. In doing so, we show that fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity. These corporate reactions follow both Senate and House committee chair changes, are present among large and small firms and within large and small states, are partially reversed when the congressman resigns, and are most pronounced among geographically-concentrated firms. The effects are economically meaningful and the mechanism - entirely distinct from the more traditional interest rate and tax channels - suggests new considerations in assessing the impact of government spending on private sector economic activity.

What Drives Home Bias? Evidence from Fund Managers' Views

A survey of fund managers reveals home bias for these sophisticated investors in an unrestricted setting. Proximity, perceived informational advantage and higher expected returns are confirmed as accompanying factors. In addition, the home bias of equity managers is also related to institutional, informational and behavioral characteristics. The perceived informational advantage does not seem to be valid. Multivariate analyses indicate that home bias is mainly related to relative return optimism, non-fundamental information and peculiar behavior towards risk. We interpret these as characteristics of less than fully rational behavior. It is consistently found that this pattern does not apply to bond managers.Eine Befragung von Fondsmanagern offenbart die Heimatverzerrung (sog. Home Bias) dieser erfahrenen Investoren in unbegrenzten Rahmenbedingungen. Nähe, empfundene Informationsvorteile und höhere erwartete Renditen werden als Begleitumstände bestätigt. Zusätzlich ist der Home Bias von Aktienfondsmanagern mit institutionellen und informatorischen Gegebenheiten sowie mit bestimmten Verhaltensmustern verbunden. Der empfundene Informationsvorteil scheint sich jedoch nicht zu bewahrheiten. Multivariate Analysen zeigen, dass der Home Bias hauptsächlich mit relativem Renditeoptimismus, der Nutzung nicht-fundamentaler Informationen und besonderem Risikoverhalten verbunden ist. Wir interpretieren diese Eigenschaften als unvollkommen rationales Verhalten. Konsistent zeigt sich, dass dieses Muster nicht für Rentenfondsmanager gilt

Network Centrality and Pension Fund Performance

We analyze the relation between the location of a pension fund in its network and the investment performance, risk taking, and flows of the fund. Our approach analyzes the centrality of the fund's management company by examining the number of connections it has with other management companies through their commonality in managing for the same fund sponsors or through the same fund consultants. Network centrality is found to be positively associated with risk-adjusted return performance and growth in assets under management, after controlling for size and past performance, for domestic asset classes; however, we do not find this relation for foreign equity holdings. These findings indicate that local information advantages, which are much stronger among managers holding locally based stocks, exhibit positive externalities among connected managers. Of particular note is that we do not find that the centrality of a manager within one asset class (e.g., domestic bonds) helps the performance of the manager in another asset class (e.g., domestic equity), further indicating that our network analysis uncovers information diffusion effects. Network connections established through consultants are found to be particularly significant in explaining performance and fund flows, consistent with consultants acting as an important information conduit through which managers learn about each other's actions. Moreover, the importance of network centrality is strongest for larger funds, controlling for any economic scale effects. Better connected funds are also better able to attract higher net inflows for a given level of past return performance. Finally, more centrally placed fund managers are less likely to be fired after spells of low performance. Our results indicate that networks in asset management are one key source of the dissemination of private information about security values

The Introduction of the Euro and its Effects on Investment Decisions

In this paper we examine changes on investment decisions induced by the introduction of the Euro. There are two potential sources of portfolio reallocation. First, the introduction of the Euro diminished exchange rate risks within the EMU region, which relieved European investors from currency risk associated with intra-EMU investments. Second, monetary policy has been bundled within one single institution, which increased the correlation of different national stock and bond market returns. We test for structural breaks in the portfolio holdings of German investors and estimate a market model in the latter in order to account for the two described effects. We observe a significant decrease in national and an significant increase in intra-EMU as well as US investments. Therefore, the establishment of the EMU led to a decrease of investment home bias

Initial Public Offerings and the Firm Location

The firm geographic location matters in IPOs because investors have a strong preference for newly issued local stocks and provide abnormal demand in local offerings. Using equity holdings data for more than 53,000 households, we show the probability to participate to the stock market and the proportion of the equity wealth is abnormally increasing with the volume of the IPOs inside the investor region. Upon nearly the universe of the 167,515 going public and private domestic manufacturing firms, we provide consistent evidence that the isolated private firms have higher probability to go public, larger IPO underpricing cross-sectional average and volatility, and less pronounced long-run under-performance. Similar but opposite evidence holds for the local concentration of the investor wealth. These effects are economically relevant and robust to local delistings, IPO market timing, agglomeration economies, firm location endogeneity, self-selection bias, and information asymmetries, among others. Findings suggest IPO waves have a strong geographic component, highlight that underwriters significantly under-estimate the local demand component thus leaving unexpected money on the table, and support state-contingent but constant investor propensity for risk