Terrorist Attacks and Investor Risk Preference: Evidence from Mutual Fund Flows with Albert Wang. Journal of Financial Economics, 2020, 137(3), 491-514.

Abstract: Using a comprehensive list of terrorist attacks over three decades, we find that aggregate investor risk preference relates inversely to the terrorism level in the US. A one standard deviation increase in the number of attacks each month leads to a $75.09 million drop in aggregate flows to equity funds and a $56.81 million increase to government bond funds. The change in risk preference depends on the likelihood that investors are experiencing depressive moods and the risk level of funds. Tests on investor sentiment and market volatility suggest that increased risk aversion most likely drives decreases in aggregate risk preference.

Mood, Attention, and Household Trading: Evidence from Terrorist Attacks  with Albert Wang. Journal of Financial Markets, Forthcoming

 Abstract: Using two sources of household data, we show that in response to psychological distress induced by terrorist attacks, households significantly reduce their trading activity and equity ownership, are less likely to enter the market, and increase the value of their savings accounts. We find that the effects of attacks are stronger in months with more casualties and increased news coverage, as well in households with a male head and in those located in the same state as the attack. Further tests on security selection suggest that our findings are consistent with risk shifting and inattention as implied by an anxiety-based utility model. 

Working Papers

Phantom of the Opera: ETFs and Shareholder Voting with Richard Evans, Rabih Moussawi and Oğuzhan Karakaş

Revise and Resubmit at Management Science

Abstract: The short-selling of exchange-traded funds (ETFs) creates “phantom” ETF shares with cash flows rights but no associated voting rights. Both regular and phantom ETF shares trade at ETF market prices. However, while regular shares are backed by the underlying securities of the ETF and voted as directed by the sponsor, phantom shares are backed by collateral that is not voted. Introducing a novel measure of phantom shares both of the ETF and corresponding underlying securities, we find that increases in phantom shares are associated with (i) decreases in number of proxy votes cast (for and against), (ii) increases in broker non-votes, and (iii) increases in the vote premium over the voting record date for important votes for the underlying stocks of the ETF. Consistent with poor governance, firms with the highest proportion of phantom shares underperform. 

Featured on the Harvard Law School Forum on Corporate Governance

Hiding in Plain Sight: The Global Implications of Manager Disclosure with Richard Evans, Miguel Ferreira, and Pedro Matos

Abstract: Given the potential for agency conflicts in delegated asset management, and the constant push for disclosure by regulators, we examine a clear potential source of agency conflicts in the mutual fund industry: anonymous fund managers. Using a global sample of mutual funds, we find that 17% of funds worldwide, excluding the US, and 22% of emerging market funds do not disclose the names of their management team. Anonymously managed funds significantly underperform, have lower active share, return gap, tracking error, and higher r2 than funds with named managers. They are more frequent in families with cooperative structures, and in bank affiliated funds. Further examining fund performance and activity around changes in SEC disclosure regulation, we find that both performance and fund activity increases following new regulation that required disclosure of manager names. This is important, as it provides evidence that the underperformance of anonymous teams is related to the disincentive brought on by anonymous management, and not solely due to less skilled managers being kept anonymous. 

Featured on the Columbia Law School Blue Sky Blog

Nationalism, Subtle Bias, and Labor Outcomes: Evidence from Global Mutual Funds with Richard Evans

Abstract: We examine the implications of subtle bias against ethnically diverse managers in a global sample of 13,000 mutual fund managers, representing 105 different nationalities, and working across 30 countries. Using a sample of fund managers working in multiple teams across multiple domiciles, we find that ethnically diverse managers rank 5%-9% lower in terms of category-month, and domicile-category-month performance rankings when working in a more nationalistic country. We extend our examination of bias and show that ethnically diverse managers are less likely to be promoted, and more likely to exit the industry. Relative to non-diverse managers, diverse managers are 12% less likely to be promoted. As with performance, this effect is larger in countries with higher levels of nationalism. We also find that prior wars fought between a managers’ ancestral origin and their working domicile is related to lower rates of promotion. Within diverse managers, senior managers face less bias, while diverse female managers face more. Building on our primary performance results, we also show that fund performance suffers as the genetic distance between members of the team increases. Using national holidays and the FIFA World Cup to ‘prime’ nationalistic feelings, we show that communication between diverse teams deteriorates when nationalistic feelings are increased. We argue this is the likely driver of diverse team underperform in our sample. 

Are Investors Misled by non-GAAP Expense Exclusions Used to Beat Analysts’ Earnings Forecasts? with Chris McCoy, Tom Lopez and Gary Taylor

Abstract: We investigate whether investors are misled by firms that exclude particular expenses in calculating non-GAAP earnings in order to beat analysts’ earnings forecasts. Our empirical analyses suggest that firms that pursue a strategy of non-GAAP reporting to beat analysts’ earnings forecasts not only avoid the market penalty normally assessed to firms that miss expectations, they are rewarded by the market. However, when we examine the future performance of these firms we find that they subsequently perform similar to firms that miss expectations. Further, our persistence tests suggest that non-GAAP expense exclusions used to beat forecasts exhibit persistence that is indistinguishable from the persistence of non-GAAP earnings. Taken together, our evidence strongly suggests that at least some investors are misled by the use of non-GAAP expense exclusions. 

Works in Progress

Friend or Foe: Information Transmission and Competition among Mutual Fund Managers with Jun Huang, Albert Wang, Endian Yan

The NFL and Household Investing Activity with David Cicero, Mi Shen and Albert Wang