The Information in Asset Fire Sales (CEIBS Working Paper, No. 001/2020/FIN)

Asset prices remain depressed for years following mutual fund fire sales. We show that price pressure from fire sales is partly due to asymmetric information. We separate trades into expected trades, which assume fund managers scale down their portfolio, and discretionary trades. We find that discretionary trades contain information about future returns, while expected trades do not. Moreover, other traders cannot distinguish between discretionary and expected trades. Our findings help explain the magnitude and persistence of fire sale discounts: fund managers choose which assets to sell and information asymmetries make it difficult for arbitrageurs to disentangle price pressure from negative fundamentals

Do Index Funds Monitor?

Passively managed index funds now hold over 30 of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (a) they are less likely to vote against firm management on contentious governance issues; (b) there is no evidence they engage effectively publicly or privately; and (c) they promote less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds decreases the alignment of incentives between beneficial owners and firm management and shifts control from investors to managers

How are shorts informed? short sellers, news, and information processing, Working Paper

Combining a database of short sellers ’ trading patterns with a database of news releases, we show that short sellers ’ trading advantage comes largely from their ability to analyze publicly available information. Specifically, the prior finding that short sellers ’ trades predict future negative returns (e.g., Boehmer, Jones, and Zhang (2008) and Asquith, Pathak, and Ritter (2005)) is more than twice as strong in the presence of news stories. Further, the most profitable short sales do not appear to come from market makers, but from clients, and these client short sales are particularly profitable in the presence of news. We find no evidence that short sellers anticipate news events, as the ratio of short sales to total volume is nearly constant around news periods, and when we do find differences between the timing of short sellers ’ trades and the overall market, relative to other types of trading there is a significant increase in short selling after news stories. We also find no evidence to support the idea the short selling around news events is more profitable because of liquidity effects; in fact, we find an increase in transaction costs on news days. Finally, short sellers ’ ability to predict returns appears to be concentrated in many of the news categories in which short sellers trade relatively late, a finding consistent wit