Three Essays in Financial Economics Open Access
Chung, Kiseo (2017)
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
Changing Career Incentives and Risk-Taking in the Mutual Fund Industry
Table 1 : Summary Statistics 65Table 2 : Change in Flow-Performance Relationship 67
Table 3 : Change in Termination Probability 68 Table 4 : Change in Risk Taking 69Table 5 : Change in Flow-Performance Relationship By Experience 70
Table 6 : Relative Difference in Flow-Performance Relationship By Experience 71Table 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 76Table 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 86Table 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 98Table 25 : Insider Trading around Home Bias Mergers 99
Table A2 : Variable Definitions 100Table 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
Off-style Holdings of Mutual Funds
Figure 1 : "Off-style" Holdings of Mutual Funds 105
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