Do the trades and stockholdings of fund managers reveal private information?

This paper examines the performance of the stock holdings and trades of a sample of Australian fund managers over the period from 1990 to 1997. When stockholdings are observable, performance measures can be constructed that are much more precise than traditional performance measures that examine the net fund return. We find the stocks held by fund managers realise abnormal returns consistent with there being some stock-selection ability across fund managers. As a more powerful examination of the private information possessed by fund managers we also examine the performance of trades. We find that the stocks they buy realise abnormal returns and the precision of the information is greater for large buy trades relative to small buy trades. For sell trades we find no evidence of abnormal returns, which suggests that fund managers do not possess superior information in regard to bad news. Overall the results, in contrast to the general consensus from traditional performance studies that fund managers do not possess superior information, are consistent with fund managers possessing superior information.UnpublishedNon Peer ReviewedBarber, B and T. Odean 2000 “Trading is Hazardous to your Wealth: The common stock investment performance of Individual Investors” Journal of Finance pp 773-80 Bernard, V., 1987, “Cross-sectional dependence and problems in inference in marketbased Accounting Research” Journal of Accounting Research 25, pp 1-48 Brown, S and W Goetzmann 1995 “Performance Persistance” Journal of Finance, Volume 50 (2) pp 679-698 Brown, S., W.N. Goetzmann, R.Ibbotson and S.Ross 1992, “Survivorship Bias in Performance Studies” Review of Financial Studies, Volume 5(4) pp 553-580 Carhart, M 1997 “On persistence in mutual fund performance” Journal of Finance, 52, pp 57-82 Chen, H; N Jegadeesh and R Wermers 2000 “The Value of Active Fund Management: An Examination of the Stockholdings and Trades of Fund Managers” Journal of Financial and Quantitative Analysis, Forthcoming Daniel, K, M. Grinblatt, S. Titman and R. Wermers 1997 “Measuring Mutual Fund Performance with Characteritic-Based Benchmarks” Journal of Finance 52 pp 1035- 1058 Elton, E., M Gruber, S.Das and M.Hlavka 1993 “Efficiency with costly information: A reinterpretation of evidence from managed portfolios”, Review of Financial Studies 6 pp 1-22 Grinblatt, M and S, Titman 1993 “Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns,” Journal of Business, 66, pp 47-68 Grinblatt, M and S.Titman 1995, Performance Evaluation in R.A. Jarrow, V. Maksimovic and W.T. Ziemba, eds Handbook in Operations Research and Management Science: Finance Volume 9 Elsevier, Amsterdam Grinblatt, M; S.Titman and R.Wermers 1995 “Momentum Investment Strategies, Portfolio Performance and herding: A study of Mutual Fund Behaviour” American Economic Review, Volume 85 (5) pp 1088-1105 Grossman, S.J and J.E Stiglitz ,1980 “On The Impossibility of Informationally Efficient Markets” American Economic Review 70: pp. 393-408 Gruber, M., 1996, Another Puzzle: The Growth in Actively Managed Mutual Funds, Journal of Finance 51, pp 783-810 Halliwell, J; R. Heaney and J. Sawicki 1999 “Size and Book to Market Effects in Australian Share Markets: A Time Series Analysis” Accounting Research Journal 12, pp122-137 Jensen, M.C., 1968 The Performance of Mutual Funds in the period 1945-1964, Journal of Finance 23, pp 389-416 Jensen, M. 1972. “Optimal utilization of market forecasts and the evaluation of investment performance” Mathematical Methods in Investment and Finance edited by Szego and Shell North Holland Press Malkiel, B 1995 “Returns from investing in equity mutual funds 1971-1991” Journal of Finance 50, pp 549-72 Merton, R.C 1981 “On market timing and Investment Performance. An Equilibrium Theory of Value for Market Forecasts” Journal of Business, 54: 363-406 Metrick, A 2000 “Performance Evaluation with Transaction Data: The stock selection of investment news letters” Journal of Finance forthcoming Moskowitz, T 2000 “Discussion of Wermers 2000”, Journal of Finance, 55 (4), pp 1695-1703 Treynor, J and F. Mazuy 1966 “Can mutaul funds outguess the market” Harvard Business Review 44 pp 131-36 Wermers, R 1997 “Momentum strategies” Journal of Finance Wermers, R 1999 “Momentum Investment Strategies of Mutual Funds, Performance Persistance and Survivorship Bias” Working paper University of Colarado Wermers, R 2000 “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking talent, Style, Transaction Costs and Expenses” Journal of Finance, 55 (4), pp1655-169

Seasonality in Fund Performance: An Examination of the Portfolio Holdings and Trades of Investment Managers

This study examines the extent to which seasonal variation arises across calendar months in the performance of active Australian equity managers. While it is well documented that there is seasonality in equity market returns, it is unknown whether calendar month variation in managed fund performance exists. Employing a unique database of monthly stock holdings, we find evidence consistent with systematic variation in the risk-adjusted performance of active investment managers over the calendar year. Specifically, we find fund performance is higher in the months when corporate earnings are announced. We also document that the performance of fund managers is lower in the months preceding the tax year-end. Finally, we report evidence that investment manager performance is greater than normal in December, possibly due to both window dressing and the Christmas holiday effect. These findings have important implications for investors attempting to exploit anomalies in fund returns by timing their entry and exit points from active equity funds. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

The quality and conservatism of the accounting earnings of local governments

Our aim is to provide insight into the usefulness of accounting earnings for measuring the economic performance of local governments across Australia. Specifically, we explore whether (i) accrual accounting provides useful information, and (ii) earnings of local governments are conservative. We find that accrual accounting by local governments provides useful information as measured by the ability to predict one-year-ahead operating cash-flows. We find no conservatism in the financial reports of the average local government. This, we posit, is due to a lower level of demand for high-quality accrual-based financial reports from these entities. Consistent with this argument, both the quality of accruals and the degree of conservatism increase for local governments for which we predict a demand for higher-quality financial reporting.Earnings Accruals Conservatism Usefulness Local governments

Speculation and e-commerce: The long and the short of IT

Over the past 25 years, the development of electronic commerce (e-commerce) has challenged and threatened firms to adapt their business models and processes. Successful adaptation can lead to improved efficiencies, growth in market share, expansion into new markets, or simply survival in competitive markets. Short-window event studies provide evidence that the market places significant value on investments in e-commerce. However, if the market misunderstands how these projects add value, value measurement based on short-run returns could be misleading. We address this possibility by examining the market reaction to e-commerce investment announcements by a sample of mining companies. We argue that this group of companies represents a sample for which, a priori, there is no expected value added to the firm from the type of investment they announce. We find strong evidence that the market reacts positively to these announcements in the days surrounding the information release. However, we find that in the three-year period subsequent to the announcement the firms realize long-run negative abnormal returns. Significant share-price rises leading up to and immediately subsequent to the announcement dates were completely reversed over the subsequent three years. We interpret this result as being consistent with the market not always understanding when e-commerce adds value. While our result is only applicable to equity investments in small, speculative ventures, it suggests some caution in the use of short-run market value changes as a measure of the value added to firms by an e-commerce investment

Restatement of CSR reports:Frequency, magnitude, and determinants

We provide the first direct analysis of the magnitude of unreliable quantitative information disclosed in corporate social responsibility (CSR) reports. CSR report reliability is of particular interest to fund managers for investment decisions as well as to policymakers for regulating and monitoring purposes. However, surprisingly little is known about CSR reporting reliability despite concerns raised in the prior literature (e.g., Laufer 2003; O'Dwyer 2002), We examine how often CSR reports for the Global Fortune 250 (G250) are restated, the magnitude of restatements, and factors associated with restatements during the period 2006 to 2013. During this sample period, the occurrence of restatements increased monotonically, with 39% of G250 CSR reports including one or more line‐item restatements. The magnitude of the line‐item restatements is quite high, with a median restatement of about 10%. We also find evidence of bias in the revised items toward overstatement. We find that restatements occur more frequently in firms that have reported a high level of social performance and that have environmental targets. The occurrence of restatement is also positively associated with firms residing in strong law countries and having their CSR reports audited. Our analysis of reporting bias indicates a negative association between use of Global Reporting Initiative (GRI) reporting guidelines and the likelihood of an overstatement. We also find a positive association between having the CSR report audited and the likelihood of revisions associated with overstatements. Together, our exploratory results indicate that CSR information may be unreliable and firms that face pressure to perform well have more restatements. However, our evidence is consistent with the restatements resulting from improvements in information systems over time rather than intentional bias. Our findings will help investors and fund managers better judge the reliability of CSR disclosures, and inform regulators and standard setters on ways to enhance the reliability of CSR reporting. Finally, we contribute to the audit literature examining sustainability assurance