Price Momentum and Idiosyncratic Volatility

We find that returns to momentum investing are higher among high idiosyncratic volatility (IVol) stocks, especially high IVol losers. Higher IVol stocks also experience quicker and larger reversals. The findings are consistent with momentum profits being attributable to underreaction to firm-specific information and with IVol limiting arbitrage of the momentum effect. We also find a positive time-series relation between momentum returns and aggregate IVol. Given the long-term rise in IVol, this result helps explain the persistence of momentum profits since Jegadeesh and Titman’s (1993) study

The Predictive Content of Aggregate Analyst Recommendations

Using more than 350,000 sell-side analyst recommendations from January 1994 to August 2006, this paper examines the predictive content of aggregate analyst recommendations. We find that changes in aggregate analyst recommendations forecast future market excess returns after controlling for macroeconomic variables that have been shown to influence market returns. Similarly, changes in industry-aggregated analyst recommendations predict future industry returns. Changes in aggregate analyst recommendations also predict one-quarter-ahead aggregate earnings growth. Overall, our results suggest that analyst recommendations contain market- and industry-level information about future returns and earnings

Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?

We show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (2001) is driven by short-term institutions. Furthermore, short-term institutions' trading forecasts future stock returns. This predictability does not reverse in the long run and is stronger for small and growth stocks. Short-term institutions' trading is also positively related to future earnings surprises. By contrast, long-term institutions' trading does not forecast future returns, nor is it related to future earnings news. Our results are consistent with the view that short-term institutions are better informed and they trade actively to exploit their informational advantage. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

Block ownership and firm-specific information

This study examines the impact of block ownership on the firm's information environment. Previous research shows that stock price efficiency depends on the cost of acquiring private information, as well as on the precision of this information. Blockholders have a clear advantage over diffuse, atomistic shareholders in terms of the precision and acquisition cost of their private information. We hypothesize that this informational advantage will manifest itself primarily in the firm-specific component of stock returns. Our empirical findings confirm that blockholders increase the probability of informed trading and idiosyncratic volatility, and decrease the firm's stock return synchronicity. These results hold for both inside and outside blockholders, but are insignificant for blocks controlled by employee stock ownership plans (ESOPs). Overall, our findings support the contention that ownership structure plays a significant role in shaping the firm's information environment.Block ownership Probability of informed trading Idiosyncratic volatility

Investor Overconfidence, Firm Value, and Corporate Decisions

Behavioral theory predicts that investor overconfidence causes overpricing because overconfident investors overestimate the precision of their information and underestimate risk. We test this prediction by using a measure of investor overconfidence derived from the characteristics and holdings of U.S. equity mutual fund managers. We find that firms with more overconfident investors are relatively overvalued based on M/B and two misvaluation measures. The impact of investor overconfidence on firm value is stronger among stocks with greater arbitrage risk. Furthermore, firms with more overconfident investors issue more equity and make more investments. Overall, our findings suggest that investor overconfidence has a significant impact on firm value and corporate decisions

AGENCY CONFLICTS IN DELEGATED PORTFOLIO MANAGEMENT: EVIDENCE FROM NAMESAKE MUTUAL FUNDS

Namesake funds provide a unique sample for studying the two agency conflicts that exist within a mutual fund. The first is between the fund management company and fund shareholders, and the second is between the fund management company and the fund manager. A typical namesake fund manager sits on his or her fund's board, frequently as the chairman, is the majority owner of the fund management company, and has significant investments in the fund he or she manages. Our results indicate that namesake funds charge higher fees, suggesting that the boards of namesake funds are less effective. We find that namesake funds are more tax efficient, consistent with the idea that managerial ownership helps align the interests of managers with those of shareholders. Because of fewer career concerns, namesake fund managers herd less while assuming greater unsystematic risk. We find weak evidence that namesake fund managers outperform their benchmarks and peers. Finally, we observe that namesake funds attract higher levels of investor cash flow. 2007 The Southern Finance Association and the Southwestern Finance Association.

Agency costs, governance, and organizational forms: Evidence from the mutual fund industry

Using a comprehensive sample of mutual funds and fund families for the period 1992-2004, this study examines the impact of fund management companies' organizational forms on the level of agency costs within mutual funds. We find that, all else being equal: (1) funds managed by public fund families charge higher fees than those managed by private fund families; (2) public fund families acquire more funds than private fund families; and (3) funds of public fund families significantly underperform funds of private fund families. Collectively, these findings suggest that agency costs are higher in mutual funds managed by public fund families. Our results are consistent with the idea that the agency conflict between the fund management company and fund shareholders is more acute for public management companies because of their shorter-term focus.Organizational form Mutual funds Agency costs