Three Essays on Financial Economics Público
Lee, Jaemin (Spring 2024)
Abstract
This dissertation contains three essays on financial economics. The first essay studies the contagion of career concern and its implications for the mutual fund industry. Fund managers reduce their risk-taking activity when their workplace peers are dismissed due to underperformance. Consistent with peer dismissal increasing the salience of the employment risk, the effect is stronger for managers (i) with higher underlying employment risk, and (ii) with stronger social ties to the dismissed manager. The dismissal also affects managers in a different firm in the same building, suggesting that the result is unlikely to be driven by firm-level shock. The peer dismissal effect is particularly more pronounced for managers who face high incentives to take excessive risks, and their funds also experience 40 to 60 basis-point improvement in risk-adjusted performance during the year following peer dismissal. These results suggest that salient employment risk can alleviate the incentive misalignment between fund managers and fund investors. The second essay studies whether and how investors’ social preference for Confederate Memorials affects their housing choice and its impact on the housing market. We find that Black, Democrat, and college-educated homeowners are less likely to live on Confederate memorial streets. Moreover, houses on Confederate streets sell for 3\% less. The Confederate effect does not spillover to adjacent houses, consistent with direct name rather than neighborhood effects. The price effect increases following attention-grabbing events that highlight racial underpinnings of Confederate symbols. Aversion to houses on Confederate streets also holds in experimental settings where house attributes are otherwise identical. The findings suggest that social norms can have important consequences for real estate markets. The third essay empirically analyzes the risk and return characteristics across firms sorted by their environmental and social (ES) ratings. We document that ES ratings have no significant relationship with average stock returns or unconditional market risk. Stocks of firms with higher ES ratings do have significantly lower systematic downside risk. However, the economic magnitude of such reduction in downside risk is small. Our results suggest that investors who derive non-pecuniary benefits from ES investing need not sacrifice financial performance.
Table of Contents
Peer Dismissal and Contagious Career Concerns 1
1 Introduction 2
2 Data and Summary Statistics 9
2.1 Mutual Funds Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Fund Manager Employment Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3 Identifying Manager Dismissal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.4 Measure of Risk-Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.5 Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3 Peer Dismissal and Risk-Taking 15
3.1 Baseline Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2 Underperforming Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.3 Junior Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.4 Bear Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.5 Social Ties with the Dismissed Peer . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.6 Robustness Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.7 Discussion on Learning Channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.8 Measurement Error in Peer Dismissal Variable . . . . . . . . . . . . . . . . . . . . . 30
4 Difference-in-Differences Analysis 31
4.1 Background on Non-Compete Agreements . . . . . . . . . . . . . . . . . . . . . . . . 31
4.2 Research Design and Identifying Assumption . . . . . . . . . . . . . . . . . . . . . . 31
4.3 Baseline Difference-in-Differences Result . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.4 Robustness Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5 Implications of the Peer Dismissal Effect 37
5.1 How Do Mutual Funds Reduce Portfolio Risk? . . . . . . . . . . . . . . . . . . . . . 37
5.2 Peer Dismissal and Agency Prone Managers . . . . . . . . . . . . . . . . . . . . . . . 39
5.3 Peer Dismissal Effect and Mutual Fund Performance . . . . . . . . . . . . . . . . . . 41
5.4 Performance Improvement Following Peer Dismissal through Effort Channel . . . . . 42
6 Conclusion 43
Confederate Memorials and the Housing Market 44
1 Introduction 45
2 Residential Sorting on Confederate Properties 50
2.1 Residential Sorting into Confederate Memorial Homes . . . . . . . . . . . . . . . . . 51
2.2 Residential Sorting into Confederate Memorial Homes – Underlying Mechanisms . . 54
3 Transaction Data and Descriptive Statistics 56
4 Identification Approach 58
5 Confederate Memorial Streets and Housing Outcomes 60
5.1 Confederate Streets and House Prices – Baseline Results . . . . . . . . . . . . . . . . 60
5.2 Confederate Streets and House Prices – Robustness . . . . . . . . . . . . . . . . . . . 61
5.3 Confederate Streets and House Prices – Street, Neighbor, or Amenity Effects . . . . 62
5.4 Confederate Streets and other Housing Market Outcomes . . . . . . . . . . . . . . . 63
5.5 Confederate Streets and House Prices – The Role of Homeowner Demographics . . . 65
5.6 Confederate House Prices: Shocks to the Saliency of Confederate Symbols . . . . . . 67
6 Confederate Memorial Name Changes and House Prices 69
7 Confederate Memorial Streets and House Preferences – Experimental Evidence 72
7.1 Experiment Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
7.2 Experimental Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
7.3 Experimental Regression Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
8 Conclusion 77
Risk, Return, and Environmental and Social Ratings 78
1 Introduction 79
2 Data 83
2.1 MSCI KLD Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
2.2 CRSP Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
2.3 Our Main Sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
3 Empirical Results 87
3.1 Unconditional Risk and Returns of ES Score-Sorted Portfolios . . . . . . . . . . . . . 87
3.2 Downside Risk of Portfolios Sorted by ES Score . . . . . . . . . . . . . . . . . . . . . 89
3.3 ES Score as a Predictor of Future Systematic Risk Exposure . . . . . . . . . . . . . . 91
3.4 Interpreting the Magnitude of the Estimated Coefficients . . . . . . . . . . . . . . . . 93
3.5 Robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
4 Potential Explanations 100
4.1 Doing Well by Doing Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
4.2 ES Preferences of Institutional Investors . . . . . . . . . . . . . . . . . . . . . . . . . 102
5 Conclusion 104
References 105
Figures 118
Tables 162
Appendices 169
Appendix A Variable Definitions for Peer Dismissal and Contagious Career Concerns 169
A.1 Fund Variables (Table 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
A.2 Manager Variables (Table 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
A.3 Performance Variables (Table 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
A.4 Social Ties Variables (Table 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
A.5 Alternative Dependent and Independent Variables (Table 7) . . . . . . . . . . . . . . 170
A.6 Subgroup Variables (Table 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Appendix B Performance and Firm Departure 172
Appendix C Additional Difference-in-Differences Analysis 180
C.1 Non-Compete Agreements and Labor Mobility . . . . . . . . . . . . . . . . . . . . . 180
C.2 Robustness of Difference-in-Differences Test . . . . . . . . . . . . . . . . . . . . . . . 183
Appendix D Variable Definitions for Confederate Memorials and the Housing Market 188
D.1 L2 Homeowner Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
D.2 ATTOM House Attributes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
D.3 Zillow Listing Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
D.4 Regional and Demographic Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
D.5 School Name Change Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
D.6 Experimental Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Appendix E Literature related to ESG, Risk, and Return 193
Appendix F Variable Definitions for Risk, Return, and Environmental and Social Ratings 194
Appendix G Robustness Tests with Sustainalytics’ ESG Ratings 197
Appendix H Robustness Tests Using Panel Regression Approaches 199
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