Are Stock Splits Credible Signals? Evidence from Short-Interest Data

We propose the change in short interest as a new metric of the signaling strength of a corporate event. If an event signals positive information, short interest should decline at the event announcement. We study short interest around stock split announcements made by NYSE firms during 1990-94. Short interest does not decline around stock splits, which suggests that the typical split does not convey a positive signal. However, short interest declines for the subset of the sample characterized by favorable industry-adjusted pre-split performance. Short interest increases significantly for firms that experience post-split liquidity improvements

Good Stewards, Cheap Talkers, or Family Men? The Impact of Mutual Fund Closures on Fund Managers, Flows, Fees, and Performance

We examine a sample of 125 equity mutual funds that closed to new investment between 1993 and 2004. We find that funds close following a period of superior performance and abnormal fund inflows. Fund managers raise their fees when they close to compensate managers for losses in income due to the restrictions in size imposed by the fund closure decision. Managers reopen when fund size declines. However, they do not earn superior returns after re-opening, suggesting that the fund closure decision does not provide information about superior fund managers.Mutual funds, Fund flows, Fund size, Fund returns, Fund manager performance Working Paper Series

Closing Time? The Signaling Content of Mutual Fund Closures

We analyze why managers of open-ended mutual funds choose to close their funds to new investment. Borrowing from Berk and Green (2004), we develop a model of the mutual fund closure decision where the main ingredient is a negative relationship between fund size and the fund’s realized return. We show that funds will find it optimal to restrict inflows following a period of superior performance. Because there is uncertainty regarding managerial skill, following closure, there is a net outflow of money that reduces the fund’s size and allows more skilled managers to realize higher returns. Therefore funds reopen after reductions in TNA, which allow them to maintain their pre-closing performance. Moreover, we show that the length of the fund closure period is positively related to post-reopening net inflows. We test the empirical predictions of the model on a sample of 141 equity mutual funds that closed to new investment between 1992 and 2002. Consistent with the model, closing funds outperform matching funds in the year prior to the closing, both in terms of inflows and returns. Closing also enables funds to retain their superior performance in the year following closure. Finally, we find that excess fund flows at reopening are significantly related to the length of the fund closure period.Mutual funds, Fund flows, Fund size, Fund returns, Fund manager performance