Now showing 1 - 3 of 3
  • Publication
    Essays in Behavioral Finance
    (Universität St. Gallen, 2022-02-21)
    When it comes to investing, humans not always behave as rational as one might think. My work tackles questions related to seemingly irrational investment behavior by using the active fund management industry as a quasi-laboratory. To answer these questions, I have collected an extensive fund and fund manager dataset. This dissertation contains three studies. In the paper 'In Military We Trust: The Effect of Managers Military Background on Mutual Fund Flows', we take a mutual fund investor's point of view. We address the question why investors continue to pay such high fees to fund managers and advisers, although actively managed funds have long been shown to underperform passive investments. The paper reveals that trust-building characteristics of fund managers affect purchase decisions of mutual fund investors. We exploit variation in fund managers prior affiliations with the U.S. military, a well-trusted institution, and relate it to fund flows. We find that funds with ex-military managers have significantly higher flows relative to other funds. Additionally, we show that investor inclination toward ex-military managers strengthens with managers' military involvement and its salience and with nationwide confidence in the military. The second paper, 'Back to the Roots: Ancestral Origin and Mutual Fund Manager Portfolio Choice', aims to understand how ancestry impacts investment decisions. The paper focuses on ancestry-induced biases that fund managers exhibit in their portfolios. We exploit variation in the ancestries of U.S. mutual fund managers and find that, compared with their peers, managers overweight stocks from their ancestral home countries. Similarly, they overweight industries that are comparatively large in their ancestral home countries. These effects are more pronounced for managers whose connection to the home country is more recent. Managers who overweight their ancestral home countries or industries do not exhibit superior performance for these holdings, which supports a familiarity bias, rather than informational advantage, based on ancestral ties. Lastly, the third paper entitled 'Jumping on the ESG Bandwagon: The Effect of ESG-Related Fund Name Changes on Fund Flows' examines whether fund firms take advantage of the environmental, social, and governance (ESG) topic to market their funds. I analyze the recent phenomenon that fund firms rebrand their conventional funds toward ESG or 'sustainable investing'. I find that funds earn abnormal flows after they rename to include ESG buzzwords in their name. ESG score improvements in their portfolios suggest that, on average, rebranded funds deliver on their new label's promise. However, I show that retail investors direct abnormal flows to rebranded funds irrespective of ESG score improvements. This indicates that retail investors rely on a fund's name when assessing its ESG-orientation and may thus be susceptible to greenwashing.
  • Publication
    Hidden Alpha
    Using the setting of financial agents, we explore the importance of hidden connections relative to all other network connections. We find that hidden connections are those associated with the largest and most significant abnormal returns accruing to fund managers—on average 135 basis points per month (over 16% alpha per year, t-stat = 3.54) across the universe of mutual funds and public firms. This is relative to insignificant abnormal returns accruing on average to all other trades, including those to trades of “visible” connections. The hidden connection premium does not appear to be driven by endogenous selection or familiarity, as fund managers seem to be correctly timing when to hold (and when to avoid) stocks of firm officers to whom they are tied. Further, the more hidden the connection is, the more valuable the information that appears to be associated with the trading across it. This hidden connection premium exists across industries, styles, time periods, and firm types; remaining strong and significant through the present day. More broadly, our findings highlight the importance of missing nodes and hidden edges when attempting to understand the true nature of shock propagation in complex network systems.