Three Essays in Financial Economics Open Access

Chung, Kiseo (2017)

Permanent URL: https://etd.library.emory.edu/concern/etds/dj52w546f?locale=en
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Abstract

This dissertation examines the role of manager's incentive and behavioral bias affecting their managerial decisions. The first essay (Changing Career Incentives and Risk-Taking in the Mutual Fund Industry) examines the career incentives of mutual fund managers and its relation to their risk taking behavior. In this chapter, I find significant changes in career incentives for mutual fund managers in recent years and corresponding shifts in managers' risk taking behavior. Successful funds receive less inflows in recent years, and poor performing funds are more likely to receive outflows. The termination decision has also become more sensitive to recent performance. Managers respond rationally to the changes in the career incentives by taking less risk. The increased performance scrutiny has fallen disproportionately on experienced managers. As a result, the Chevalier and Ellison (1999) finding that inexperienced managers take less risk than experienced managers is overturned in the more recent period, consistent with commensurate shifts in their career incentives. The second essay (CEO Home Bias and Corporate Acquisitions), coauthored with Clifton Green and Breno Schmidt, investigate the effect of CEO's home bias on firm's investment decisions. In this chapter, we find that CEOs are significantly more likely to purchase targets near their birth place, consistent with either informational advantages or familiarity bias. Evidence from bidder announcement returns supports the latter view. Acquirer returns are significantly lower for CEO home bias acquisitions, and the relation is robust to controls for firm and industry characteristics. The negative announcement effect is stronger when the target is located further away, among poorly-governed firms, and when the CEO has a deeper birth place connection. CEOs' post-acquisition trading behavior also supports a familiarity bias interpretation. Our findings suggest that CEO home bias influences firm investment. The third essay (Off-style Holdings of Mutual Funds) examines whether mutual funds hold stocks that do not match their stated investment style on a regular basis, and explore the motivation behind such holdings. I find that funds hold a significant portion of their holdings in stocks that do not match their stated investment style (20%-35%), which is consistent with S.E.C. regulation 35d. The reason for holding "off-style" stocks could be because of information sharing between funds or "co-insurance" between funds. I find evidence that supports both.

Table of Contents

Table of Contents

Changing Career Incentives and Risk-Taking in the Mutual Fund Industry 1

Introduction 2

Data and Variable Construction 6

Sample Selection 6

Variable Construction 10

Summary Statistics 11

Results 12

Changes in Career Incentives and Risk Taking 12

Changes in Career Incentives by Career Stage 17

Changes in Risk Taking by Career Stage 19

Robustness Checks 22

Conclusion 26

CEO Home Bias and Corporate Acquisitions 28

Introduction 29

Data and Variable Construction 34

Acquisition Sample 34

Measuring CEO Home Bias 35

Sample Summary Statistics 37

Results 37

Home Bias and Acquisition Propensity 37

Market Response to Home Bias Acquisitions 41

Acquirer Returns Following CEO Home Bias Mergers 41

Corporate governance and CEO home bias acquisitions 44

Strength of Home Region Connection 45

Public vs. Private Targets 47

Robustness Checks 48

CEO Home Bias Mergers and Insider Trading 50

Conclusion 52

Off-style Holdings of Mutual Funds 54

Introduction 55

Data 59

Sample Selection 59

Sample Summary Statistics 60

Results 61

Reason for "Off-style Holdings" 61

Conclusion 63

Appendix 65

Tables 65

Figures 105

References 108


List of Tables

Changing Career Incentives and Risk-Taking in the Mutual Fund Industry

Table 1 : Summary Statistics 65

Table 2 : Change in Flow-Performance Relationship 67

Table 3 : Change in Termination Probability 68 Table 4 : Change in Risk Taking 69

Table 5 : Change in Flow-Performance Relationship By Experience 70

Table 6 : Relative Difference in Flow-Performance Relationship By Experience 71

Table 7 : Change in Termination Probability by Experience 72

Table 8 : Relative Difference in Termination Probability by Experience 73 Table 9 : Risk Taking and Experience 74 Table 10 : Risk Taking and Experience for Different Definitions of Lead Manager 76

Table 11 : Risk Taking Behavior by Fund Size Grouping 78

Table 12 : Risk Taking Behavior for Other Risk Taking Measures 80

Table 13 : Risk Taking and Fund Manager Industry Experience 82

Table 14 : Change in Termination Probability 83 Table A1 : Variable Definitions 84 CEO Home Bias and Corporate Acquisitions Table 15 : Merger Summary Statistics 86

Table 16: CEO Home Bias and the Probability of Acquisition 88

Table 17 : Bidder Announcement Returns for CEO Home Bias Mergers 90

Table 18 : Corporate Governance and the Probability of CEO Home Bias Acquisitions 91

Table 19 : Governance and Bidder Announcement Returns 92

Table 20 : Strength of Home Bias and Probability of an Acquisition 94

Table 21 : Strength of Home Bias and Bidder Announcement Returns 95

Table 22 : Bidder Returns for Public and Private Targets 96

Table 23 : Simulation Evidence for Bidder Returns 97

Table 24 : Calendar Time Bidder Returns 98

Table 25 : Insider Trading around Home Bias Mergers 99

Table A2 : Variable Definitions 100

Table A3 : Home Bias based on MSA and Probability of Acquisition 102

Table A4 : Home Bias based on MSA and Bidder Announcement Returns 103

Table A5 : Bidder Returns with Different Event Windows 104

Off-style Holdings of Mutual Funds

Table 26 : Sample Summary Statistics 106 Table 27 : Performance of "Off-style" Stocks 107


List of Figures

Off-style Holdings of Mutual Funds

Figure 1 : "Off-style" Holdings of Mutual Funds 105

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