In this dissertation, I address two main topics regarding mutual fund. One is performance persistence in general, and the other is conflict of interest for investment bank-affiliated mutual funds.
The first chapter examines the concentration of active mutual fund managers' research efforts toward information-intense stocks and the degree to which they are successful in such efforts. We show that funds that hold stocks with high information intensity exhibit large performance dispersion, indicating that both skilled and unskilled fund managers are attracted to such stocks. Moreover, the performance of these funds is predictable by fund skill proxies such as past fund alphas, and the well-known phenomenon of performance persistence is only observed among funds with high information intensity. The effect of fund information intensity on performance persistence is robust to the control of characteristics of fund holdings such as market cap, illiquidity, and return volatility, and is different from the effect of existing measures of fund activeness. Finally, information intensity increases fund flow sensitivity to past performance. These findings suggest that, with costly information production, information intensity is an important dimension of active investment decisions by fund managers and an important dimension of fund selection decisions by investors.
The second chapter examines the conflict of interest in IPO share allocations by investment banks and by fund management companies. Affiliated mutual funds successfully avoid cold IPOs. However, they are “crowded out” of hot IPOs -- the IPO shares they do receive are inversely related to the hotness of the IPOs. Within affiliated fund families, funds with larger size, higher expense ratio, and higher past returns are more likely to receive IPO shares. However, these funds receive less allocations for hotter IPOs. Overall, my findings present a more complicated picture to the conflict of interest in IPO share allocations than suggested by prior studies.
The third chapter examines the relation between mutual fund turnover and performance persistence. Existing studies have reported mixed empirical relations between portfolio turnover and mutual fund performance. This paper documents strong heterogeneity in the turnover-performance relation, which helps reconcile the contrasting evidence in prior studies. While there is no significant relation between turnover and fund performance on average, performance is particularly dispersed among high-turnover funds. Further, performance persistence is much stronger among funds with higher turnover. These findings are consistent with the notion that turnover is persistently and positively related to performance for some fund - possibly due to the fact that turnover is driven by available investment opportunities, while persistently and negatively related to performance for other funds - possibly due to high trading costs associated with high turnover. Finally, we find that the relation between turnover and performance persistence is largely a cross-sectional effect, not a time-series effect.