CONNECTIONS, INSIDER INFORMATION AND INSTITUTIONAL TRADES Público
Tang, Yue (2011)
Abstract
This dissertation explores the channels that institutional funds and managers use to obtain informational advantage. The first essay ("Business connections and informed trading of mutual fund managers") explores the hypothesis that investors gain information advantages through business connections made during prior employment. Using hand-collected data, I find that mutual fund managers who previously worked as sell-side analysts put significantly more weight on the stocks they previously covered, and those stocks perform significantly better than the other stocks in their portfolio. Holdings of stocks that the fund managers covered previously outperform their other holdings by 18 percent annually. The abnormal returns are concentrated around earnings announcements and fund managers' trades of covered stocks predict subsequent earnings surprises. However, the superior performance of covered stocks decreases significantly after the implementation of Regulation-FD, which prohibits selective disclosure by company management. Also, after executive changes at the covered companies, fund managers place less weight on covered stocks, and they no longer earn abnormal returns on them. The results indicate that fund managers have access to inside information through the business connections they made while working as analysts. In the second essay ("Institutional trades around takeover announcements: skill vs. inside information" - co-authored with Narasimhan Jegadeesh), we examine the pattern and profitability of institutional trades around takeover announcements. We find that the trades of funds as a group, either before or after takeover announcements, are not profitable. However, funds whose main broker is also a target advisor are net buyers of target shares before announcements and their pre-announcement trades are significantly profitable. Therefore, leakage of inside information from brokerages that advise the target is a significant source of funds' informational advantage. We also find that a subset of funds is skilled at privately gathering information even when they do not trade through target advisors.
Table of Contents
First Essay: Business Connections and Informed Trading of Mutual Fund Managers
I. Introduction. 1
II. Data. 7
III. Results. 10
1. Holdings of Covered Stocks. 10
2. Returns on Covered Stocks. 11
2.1. Covered Stock Holdings. 11
2.2. Covered Held vs. Covered Non-held. 13
2.3. The Persistence of Covered Holding Performance. 14
3. Returns around Earnings Announcements and Earnings Surprise Prediction. 16
4. Alternative Explanations for Fund Managers' Information Advantage. 18
4.1. Regulation FD.. 19
4.2. Covered Industries. 19
4.3. Corporate Executive Changes. 21
5. Determinants of the Information Advantages. 23
6. Optimal Weight of Covered Stocks. 26
IV. Conclusions. 28
V. References: 29
Second Essay: Institutional Trades around Takeover Announcements: Skill Vs. Inside Information
I. Introduction. 47
II. Related Literature. 51
III. Data. 54
IV. Institutional Trades around Takeover Announcements. 56
1. Institutional Trades. 56
2. Determinants on Institutional Trading. 59
3. Institutional Trading and Merger Outcomes. 60
V. Profitability of Institutional Trades. 61
VI. Pattern and Profitability of Trades by Funds whose Main Brokers are Advisors. 63
1. Main Brokers/Advisors. 64
2. Returns of MB-TA Fund Trades. 67
VII. Are Some Funds Skilled?. 68
1. Identification of "Smart" Funds. 68
2. Returns of Smart Fund Trades. 70
VIII. Conclusions. 72
IX. References. 75
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