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Board Structure and Fee-Setting in the US Mutual Fund Industry
Abstract
This study uses a new database to describe the composition and compensation of boards of directors of U.S. open-end mutual funds. We use these data to examine the relation between board structure and the fees charged by a fund to its shareholders. We find that shareholder fees are lower when fund boards are smaller, have a greater fraction of independent directors, and are composed of directors who sit on a large fraction of the fund sponsor's other boards. We find some evidence that funds whose independent directors are paid relatively higher directors' fees approve higher shareholder fees.
... This is motivated by a growing body of literature that attempts to establish a link between board characteristics and mutual fund fees and returns. 2 Specifically, we examine the impact of four board variables (board size, CEO duality, board independence, and board diversity) on fees and returns of corporate class funds in Canada. Our results indicate that 2 Tufano and Sevick (1997) find a strong relationship between boards with effective governance structure and shareholder fees charged by mutual funds. Del Guercio, Dann, and Partch (2003) find that board characteristics associated with board independence are linked with lower expense ratios and value enhancing restructurings. ...
... In this regard, our study lends theoretical support in favor of corporate class funds in Canada. Secondly, our study builds upon the work of Cremers et al. (2009), Del Guercio et al. (2003, Khorana, Tufano, and Wedge (2007), Kong and Tang (2008), and Tufano and Sevick (1997), who attempt to establish the link between board characteristics and mutual fund fees and performance in the US. Our study adds value by analyzing the mutual fund market in Canada, which differs significantly from the US in terms of structure, culture, and regulatory framework. ...
... Cremers et al. (2009) find that director ownership is positively related to fund performance, and non-independent director ownership is also positively related to lower expense ratios. Tufano & Sevick (1997) find that relatively higher paid independent directors approve higher fees. Del Guercio et al. (2003) find that funds with low expense ratios have relatively low director compensation. ...
The Canadian mutual fund setting is unique in that two governance mechanisms corporate and trust coexist. This study empirically examines the impact of each mechanism on fund fees and performance. We find that corporate class funds charge higher fees but deliver superior fee-adjusted returns than trust funds. We then analyze the impact of various board characteristics on fees and performance for corporate class funds. We find that a board with smaller size, CEO duality, and a higher percentage of independent directors is more likely to charge lower fees. In addition, smaller boards are strongly associated with higher fee-adjusted performance. Our study supports agency theory over stewardship theory and provides valuable guidelines for Canadian investors and regulatory agencies.
... The empirical evidence for the effectiveness of such a measure is mixed, however. Tufano and Sevick (1997) show that small boards dominated by independent directors tend to set more competitive fund fees, and Ding and Wermers (2012), analysing the characteristics of management company and mutual fund board jointly, show that the presence of independent directors is crucial for terminating underperforming seasoned portfolio managers and for assessing performance, thereby upholding the findings of Tufano and Sevick (1997) concerning fees. Ferris and Yan (2007) however, assert that the probability of a fund scandal, the level of fund fees and fund performance are not significantly related either with chair or board independence. ...
... The empirical evidence for the effectiveness of such a measure is mixed, however. Tufano and Sevick (1997) show that small boards dominated by independent directors tend to set more competitive fund fees, and Ding and Wermers (2012), analysing the characteristics of management company and mutual fund board jointly, show that the presence of independent directors is crucial for terminating underperforming seasoned portfolio managers and for assessing performance, thereby upholding the findings of Tufano and Sevick (1997) concerning fees. Ferris and Yan (2007) however, assert that the probability of a fund scandal, the level of fund fees and fund performance are not significantly related either with chair or board independence. ...
The impact of a switch of management company on pension plan fees is analysed by comparing the effects on employer-sponsored versus individual defined-contribution private pension plans in Spain. This framework is ideal because the two types differ significantly both in plan governance structure and consequently in the degree of bargaining power held by the decision-maker. In addition, intense bank restructuring, which has greatly modified the Spanish pension plan map, provides an interesting analytical context for the identification of causal links, because it is a scenario that features shocks exogenous to the relationship under analysis. The results show that a switch of management company significantly reduces management fees for employer-sponsored plans when the management change is not due to the bank restructuring process, on the contrary a switch of management company increases fees for individual pension plans.
... Several studies (e.g., Jensen, 1968;Carhart, 1997;Wermers, 2003;Berk and Green, 2004;Fama and French, 2010) contribute to the debate whether managers of active funds add value to their investors. Tufano and Sevick (1997) and Fu and Wedge (2011) look closer at the governance of mutual funds and find that the independence of the board positively affects the fee structure. Jain and Wu (2000) and Gallaher, Kaniel, and Starks (2015) show that funds do not experience superior performance after advertising a fund but attract significantly higher fund flows compared to a group of control funds. ...
... In particular, better governed funds might provide more accurate information on their investment strategy, and this information is updated in a timely manner. For instance, we know from the literature that funds with better, i.e., more independent, board governance achieve higher returns and charge lower fees (Tufano and Sevick, 1997;Ding and Wermers, 2012). Second, updates in funds' strategy statements might signal investors that a fund indeed makes adjustments to its investment strategy, and this adjustment is profitable for investors in terms of next years' risk-adjusted fund performance. ...
... Note that the fees have to be approved by the Board and the latter might thus have an impact on the % of fees charged to service providers. (Tufano & Sevick, 1997) analyse the relationship between Board composition and fees in more detail. As in any business, Boards are legally charged with the protection of shareholders' interests. ...
... In order to evaluate this potential governance issue, (Tufano & Sevick, 1997) analyse a sample of US open-end mutual funds which account for 69% of all US open-end mutual fund assets. The following characteristics of mutual fund boards are analysed: ...
... On the contrary, some contend that growth in fund size provides cost advantages because brokerage commissions and research costs, as well as administrative and overhead expenses, do not increase in direct proportion to fund size. Elton et al. (2012), McLeod and Malhotra (1994) and Tufano and Sevick (1997) believed that the fund size positively affects the performance of the mutual fund. They argued that an increase in fund size provides cost advantages (e.g. brokerage commission, overhead cost, research cost and administration that is not added to additional cost). ...
... As discussed earlier, some previous studies suggest that a smaller fund (size) will have a higher operating efficiency, for example, Kleiman and Sahu (1988), Gorman (1991), Yan (2008), Berk and Green (2004), Chen et al. (2004), Becker and Vaughan (2001) and Dahlquist et al. (2000). By contrast, other studies such as Tufano and Sevick (1997) McLeod and Malhotra (1994) and Elton et al. (2012) found that larger funds achieve economies of scale, which are passed on to investors as lower expenses. As such, the relationship between fund size and the returns of mutual funds is still ambiguous. ...
Purpose
This paper investigates the impact of investor confidence on mutual fund performance in two relatively vulnerable but leading emerging markets, India and Pakistan.
Design/methodology/approach
A pooled OLS model is used to look at two alternative measures of investor confidence and test for the relationship between investor confidence and mutual fund returns. To check the robustness of the findings, the authors also implement Two Stage Least Squares and Generalized Method of Moments techniques to control for unobserved heterogeneity, simultaneity, and dynamic endogeneity problems in the regressors.
Findings
The paper finds that the returns of mutual funds are positively associated with investor confidence and an interaction effect exists between investor confidence and persistence in performance. The paper also confirms that returns from mutual funds are associated with different fund characteristics such as fund size, turnover, expense, liquidity, performance persistence and the fund’s age. These findings remain robust to alternative model specifications and measures of investor confidence.
Originality/value
While the previous literature mainly focuses on mutual fund characteristics and the macroeconomic determinants of mutual fund returns, this paper demonstrates that investor confidence plays an important role in determining mutual fund performance. The authors attribute this finding to two relatively unique features of the emerging markets in our study. A lack of awareness of mutual funds as being a low-cost investment vehicle and the interplay of cultural and behavioural changes have prevented investor’s savings from being channelled into investment products, away from gold or property.
... The negative relationship between funds' performance and costs is a typical result in the literature (e.g., Barber and Odean 2000;Brown et al. 2004;Barber et al. 2005). This result has been documented in Spain (e.g., Díaz-Mendoza et al. 2014;Marco 2007;Martinez 2003) and in other markets (e.g., Gruber 1996;Carhart 1997;Tufano and Sevick 1997;Malhotra and McLeod 1997). A nice and comprehensive discussion on investing costs can be found in the paper by French (2008). ...
... This way of measurement has been chosen for this variable because of the extreme values that present in the upper and lower tails (see Table 4). We also include dummy variables to control for Observations: 2773 9 Ferris and Chance (1987), Berk and Green (2004), Berkowitz and Kotowitz (2002), Gil-Bazo and Ruiz-Verdú (2009), Barber and Odean (2000), Brown et al. (2004), Barber et al. (2005), Gruber (1996), Carhart (1997), Tufano and Sevick (1997), Malhotra and Mcleod (1997), Fama and French (2010). fund family membership for the year. ...
In this study, we empirically explore the implications of a non-standard mutual fund performance fee structure. This contract deviates from the designs recommended in previous literature, in that, it lacks a benchmark portfolio and fails to apply a high-performance fee component, making a timid attempt to align investors’ and managers’ interests. Using a panel data model, we compare the risk-adjusted performance measures for funds with and without performance fees, within the same investment policies. Some investment categories, that charge a performance fee component, earn superior risk-adjusted returns; additionally, they attract investors. The empirical implications of this study back up the prevailing theory.
... Dellva and Olson (2005) explored a range of factors affecting fees, including operational expenses, fund types, performance, duration time, subscription fees, 12b-1 fees, and redemption fees. Tufano and Sevick (1997) found that funds with smaller boards of directors tend to have lower fees. ...
This study investigates the association among management fees, ESG scores, and investment performance of ESG funds in China. It explores the significance of comprehending the cost–benefit analysis and long-term yields associated with sustainable investing. The investigation specifically concentrates on China’s open-end equity funds and uncovers some noteworthy discoveries. Initially, funds with higher management fees tend to yield greater returns, suggesting a potential validation for these fees. Nevertheless, when taking risk-adjusted metrics into account, these funds do not exhibit superior performance, indicating that the elevated fees may not necessarily result in enhanced performance after factoring in risk. Furthermore, the analysis discloses an adverse influence of ESG factors on fund performance. In general, the findings indicate that ESG funds in China do not impose higher management fees and do not ensure better returns but often produce superior risk-adjusted investment performance if their ESG scores are moderately higher. Exceptionally high ESG scores can end up with the worst risk-adjusted investment performance.
... By studying equity-linked notes, Tufano and Sevick determined that the proposed innovative financial product may reduce bank costs by deferring the payment of capital income tax [21]. Guner considers that OBI may reduce the borrowing cost of loans in the sales of banks' wealth management products [22]. ...
Given the rapid development of financial technology, the off-balance-sheet business innovations of banks may potentially impact bank risk-taking. This issue is of great importance to commercial banks and financial regulators. This paper analyzed the relationship between off-balance-sheet business innovation (OBI) and Bank Risk-Taking (BRT) in Chinese commercial banks, as well as the mediation role of the Bank Agency Cost (BAC), the impact of a bank’s Internal Control Quality (ICQ) on this relationship, and the moderating role of Bank Competition (BCMP) by analyzing panel data from a sample of 130 Chinese commercial banks from 2009 to 2019. The results of this empirical exercise showed that (1) OBI has a significant negative correlation with BRT, evidencing that off-balance-sheet business innovation can improve bank risk management processes and enhance the bank’s operating performance, thereby reducing their willingness to transfer risks, restraining the BRT level. Compared with state-owned and joint-stock banks, OBI has a more significant inhibitory effect on BRT in urban and rural commercial banks. (2) BAC showed a mediation role in the relationship between OBI and BRT levels. Bank OBI can inhibit BRT levels by BAC reduction, demonstrating an effective mediation channel. (3) The degree of BCMP displayed a positive moderation effect on the relationship between the explained and explanatory variables, which means that, at higher BCMP levels, the inhibitory effect of OBI on BRT levels becomes more significant. (4) Additionally, this exercise also found that a bank’s ICQ can enhance the impact of OBI on BRT. The research contributions of this paper constitute an important theoretical significance and reference value for researchers exploring mechanisms that can improve innovation in the commercial banking industry and give importance to financial supervision and financial system risk control.
... The control variables are classified into four groups: fund, fundfamily, investor and fund manager characteristics that are documented to affect fund downside risk (Christoffersen et al., 2014;Bodnaruk & Simonov, 2016;Karagiannis & Tolikas, 2019). To control for fund characteristics, for each fund and for each calendar quarter, we calculate a fund's objective-adjusted quarterly return ( ) as its cumulative monthly net return in a quarter minus the median return for that quarter of the funds with the same investment objective, following Tufano and Sevick (1997). A fund's volatility ( ) is the standard deviation of daily net returns across a quarter. ...
Whether responsible investing reduces portfolio risk remains open to discussion. We study the relationship between ESG performance and downside risk at fund level in the Chinese equity mutual fund market. We find that fund ESG performance is positively associated with fund downside risk during the period between July 2018 and March 2021, and that the positive relationship weakens during the COVID-19 pandemic. We propose three channels through which fund ESG performance could affect fund downside risk: (i) the firm channel in which the risk-mitigation effect of portfolio firms’ good ESG practices could be manifested at fund level, (ii) the diversification channel in which the portfolio concentration of high ESG-rated funds could amplify fund downside risk, and (iii) the flow channel in which fund ESG performance may attract greater investor flows that could reduce fund downside risk. We show evidence that the observed time-varying relationship between fund ESG performance and downside risk is driven by the relative force of the three channels.
... First, given a significantly smaller investable universe largely constrained to a single industry, it is plausible REMF managers are more likely to be chasing similar investment opportunities. Second, the transparency 3 A few examples of earlier work on the effect of scale in mutual fund performance include Tufano and Sevick (1997) who argue cost savings at scale improve performance and Perold and Salomon (1991) who discuss price impact of large transactions driving diseconomies of scale for funds. 4 Consistent with this, Chen et al. (2004) and Yan (2008) focus on liquidity constraints (price impact) as the mechanism and show that fund size erodes alpha. ...
This paper investigates the role of scale in Real Estate Mutual Fund (REMF) performance. We test the impact of both fund-level and industry-level economies of scale on fund performance. We provide consistent evidence that industry size erodes REMF performance. After controlling for endogeneity concerns, we document an insignificant relation between fund size and performance. Taken together, these findings suggest that the rapid growth of the REMF industry over the past few decades has materially impacted active managers’ ability to consistently outperform their passive benchmarks. As more capital flows into the industry, competition for alpha increases, and investment opportunities dwindle. This effect is stronger in funds who are especially active in seeking out those increasingly elusive opportunities. Specifically, the effect of industry size on alpha is particularly negative for funds with higher turnover ratios, expense ratios, and volatility of returns.
... Renneboog et al. (2008) note that SRI investors are willing to accept suboptimal financial performance to pursue social or ethical objectives. However, fund performance can be affected by many factors; for example, US equity funds are positively affected by board independence (Ding and Wermers 2005), but performance decreases when highly paid independent directors sit on the boards of mutual funds (Tufano and Sevick 1997). Benson et al. (2011) report that pension funds' returns improve with trustee board size and regular reviews of conflicts of interests. ...
In this paper, we investigate characteristic differences between Socially Responsible Investment (SRI) funds and conventional funds across 35 different categories, including previously unexplored areas, such as fund manager skills and investment strategies. Further, we examine SRI and conventional funds globally rather than from just one country (e.g., US) or one region (e.g., Europe), covering funds listed in 22 different countries. We also adopt a new Principal Component Analysis (PCA) methodology for matching SRI funds against their conventional counterparts that significantly increases the sample size from previous studies, reducing selection bias and possibly explaining contradictory findings in the prior literature. Contributing to the literature, our findings show that: (i) SRI funds have more diversified portfolios than conventional funds; (ii) SRI funds have lower cash holdings while investing more in US equities; and (iii) SRI fund managers charge a smaller fee and are more successful in managing their portfolios. This is reassuring for investors who invest in SRI funds and for the future health and sustainability of the planet.
... The role of Board size in this study did not have a meaningful influence in improving the performance of investment portfolios. This also indicated that it did not support researches (Del Guercio et al., 2003;Tufano & Sevick 1997) stating that small boards had a more direct impact on performance because they negotiated cheaper fund management contracts. Jensen (1993) stated that board size and board composition are often common corporate governance problems, because the benefits of increased monitoring that follow a larger board are comparable to the weak communication and decision making of larger groups. ...
... The paper contributes to three main strands of the literature. First, our paper relates to the growing literature on governance is significantly improved if more independent directors are on the board or if independent directors have a higher ownership in the fund and thus a higher motivation to effectively monitor the fund (see, e.g., Tufano and Sevick (1997), Ferris and Yan (2007), Khorana, Tufano, and Wedge (2007), , and Ding and Wermers (2012). ...
The first chapter studies how the introduction of a futures market for steel affects steel producers and their customers. The second chapter asks how import tariffs in upstream industries affect downstream firms’ incentives to invest. The third chapter studies how managerial ownership affects performance in the mutual fund industry.
... is the expense ratio of the funds. Tufano and Sevick (1997), Del Guercio, Dann, and Partch (2003), Malhotra, Jaramillo, and Martin (2011) find that better managed funds have lower expense ratios. ...
This paper examines the risk-adjusted performance and differential fund flows for socially responsible mutual funds (SRMF). The results show that SRMF rated high on ESG, perform better than lower rated ESG funds during the period of economic crisis. The findings also show that low ESG rated SRMF had higher differential cash-flows than high rated ESG funds except for the period of economic down turn. The findings are of interest to financial advisors, investors, mutual fund managers, and researchers on how SRMF performance responds to periods of economic downturn and expansion
... Others have debated the merits of outside directors. 5 And others yet have investigated the factors affecting the number of outside directorships held by CEOs (Booth and Deli, 1996;Kaplan and Reishus, 1990;Gilson, 1990), the value of having outside directors who are CEOs on the board (Fich, 2000), the evolution of board structure (Denis and Sarin, 1998), the presence of committees (Klein, 1995), as well as the relation between board structure and compensation (Tufano and Sevick, 1997). In general, however, the phenomena of seat accumulation and board overlap have not attracted much attention. ...
We examine the board overlap among firms listed in Switzerland. Collusion, managerial entrenchment, and financial participation cannot explain it. The overlap appears to be induced by banks and by the accumulation of seats by the most popular directors. We also document that seat accumulation is negatively related to firm value, possibly because of the conflicts of interest that multiple directorships induce and the time constraints directors face. Contrary to popular beliefs, however, the directors of traded firms do not generally hold more than one mandate in other traded firms. They do hold multiple seats in non-traded firms.
... More closely related to this paper, one strand of mutual fund literature has focused on the determinants of mutual fund ownership costs. Early references include Ferris and Chance (1987), Chance and Ferris (1991), Malhotra and McLeod (1997), Tufano and Sevick (1997) and Dellva and Olson (1998). More recent analyses are Lesseig et al. (2002) and Golec (2003). ...
This paper re-examines the determinants of mutual fund fees paid by mutual fund shareholders for management costs and other expenses. There are two novelties with respect to previous studies. First, each type of fee is explained separately. Second, the paper employs a new dataset consisting of Spanish mutual funds, making it the second paper to study mutual fund fees outside the US market. Furthermore, the Spanish market has three interesting characteristics: (i) both distribution and management are highly dominated by banks and savings banks, which points towards potential conflicts of interest; (ii) Spanish mutual fund law imposes caps on all types of fees; and (iii) Spain ranks first in terms of average mutual fund fees among similar countries. We find significant differences in mutual fund fees not explained by the fund’s investment objective. For instance, management companies owned by banks and savings banks charge higher management fees and redemption fees to nonguaranteed funds. Also, investors in older non-guaranteed funds and non-guaranteed funds with a lower average investment are more likely to end up paying higher management fees. Moreover, there is clear evidence that some mutual funds enjoy better conditions from custodial institutions than others. In contrast to evidence from the US market, larger funds are not associated with lower fees, but with higher custody fees for guaranteed funds and higher redemption fees for both types of funds. Finally, fee-setting by mutual funds is not related to fund before-fee performance.
... First, mutual funds in US are corporate entities and a specific board of directors (or trustees) oversees each fund (Tufano and Sevick 1997;Gil-Bazo and Ruiz-Verdú 2009); whereas in China mutual funds are not corporate entities but they are contract funds. Chinese mutual funds are wholly managed by their funding companies. ...
The aim of this study is to analyze performance of mutual funds of biggest emerging economy i.e. China. Examining Chinese mutual funds’ performance provides an opportunity to assess the ability of fund managers to outperform the benchmark market. We study the equity mutual funds of China by taking the sample of 707 funds for the period from 2004 to 2015 and evaluate their performance using Capital Asset Pricing Model, Fama–French three factor model and Carhart four factor model. It is found that mutual funds in China give better return than the benchmark market return which means that active management pays better than passive management in mutual fund industry. Moreover, this study also investigates the existence of persistence in the performance of mutual funds and findings indicate that mutual funds in China are not consistent in their performance. Winner (Top-Performing) funds of last year do not continue to be winner funds in the following year and loser funds of previous year give better return in the following year. Overall findings indicate the non-existence of persistence in the performance of Chinese mutual funds.
: This research aims to study retail investors' preferences towards mutual funds from Gujarat perspective. For this, survey approach was used in order to solicit primary data from the respondents. The structure questionnaire was distributed among 325 respondents out of which 288 valid questionnaires were received with full response with 88.62 percent response rate. The survey was carried out in the month of August-September, 2019. The data were analyzed using SPSS version 20. The results of this study indicated that majority people make investment with an objective of getting tax relief; there is association between: 1) occupation and kind of investments 2) occupation and mode of investments. The findings of this study provide valuable insights to mutual funds companies and govt. about which factors affects investors' investment decisions towards mutual funds. Moreover, investors can have ideas about what other investors think of about investment in mutual funds. The limitations of this study will create scope for further research in same domain in future.
This study examines whether independent directors who possess financial expertise and are independent from the CEO (i.e., non‐co‐opted) are associated with improved outcomes for industry superannuation funds. Our results highlight that independence alone is insufficient to improve fund outcomes. Instead, we find that only non‐co‐opted independent directors benefit fund members in terms of higher performance and lower fees. Moreover, we find that independent directors' financial expertise is not associated with fund performance and fees. Our study has implications for regulators and superannuation funds who are currently debating the need for one‐third independent directors on the board of Australian superannuation funds.
This study examines boardroom connections that form when corporate executives sit on mutual fund boards. These connections have the potential to facilitate information flow that informs fund investment decisions. I find that fund trades in the executive's firm anticipate future earnings news and stock returns during the period that the fund and firm are connected. The evidence is consistent with a broad scope of information being transferred through the connections, implying the potential for these connections to have an economically significant impact. For example, trades in the executive's firm predict returns both inside and outside of the earnings announcement period, and trades in stocks in the same sector as the executive's firm also predict returns. This study highlights the potential for the role of fund directors to extend beyond their formal monitoring responsibilities and act as conduits of information.
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Superannuation fees have come under public scrutiny in recent years with the belief they are too high. We examine the determinants of fees and their relationship with fund performance. Superannuation funds with higher investment fees have higher allocations to asset classes that trade in more complex markets. For-profit retail funds charge both higher investment and administration fees than other funds. Funds with higher investment fees do not generate higher returns than the least expensive funds. These findings suggest that superannuation members may not earn higher after-fee risk-adjusted returns by holding funds with higher fees.
JEL Classification
G11
A decade has passed since the global financial system introduced a new phenomenon, cryptocurrencies and blockchain technology. That is evolving in Turkey where there is strong involvement with world finance capital. In this paper, we first investigate main dynamics of cryptocurrencies. Their characteristics, usage, functions and role in globe briefly. The remainder of the chapter devoted solely Turkish case. How the legal system fits into those new instruments. We also searched the drives of Turkish citizen’s demand for these new assets and their ability to cope with this investment opportunity. In the end, we do share our humble opinions for the future trends of cryptocurrency for Turkish economy.KeywordsCryptocurrencyBlockchaine-commercee-moneyTurkeyTurkish economyTurkish financial system
This paper evaluates the usefulness of analyst assessments to select mutual funds, using the Morningstar Analyst ratings. These notes are forward-looking qualitative and quantitative analyses of mutual funds about five pillars: Process, Performance, People, Parent and Price, that includes factors like the cost, past performance, quality of management or interest alignment. Our sample contains US equity funds covering the period August 2012 to August 2016. Our conclusions support the ability of Gold ratings to select funds that will behave better in terms of future performance. We have found little evidence that, on average, funds with a better Analyst Rating (Gold) have a better performance in terms of risk adjusted measures (alpha and sharpe). The predictability is observed in several analyses done in one year ahead but not for three-years. This evidence is more relevant in the case of the analysis made by investment style´s category.KeywordsMutual fundsPerformancePersistenceRatingsMorningstar
This study examines the Socially Responsible (SR) exchange‐traded funds (ETFs) by comparing their risk‐adjusted performance with a matched group of conventional ETFs in the U.S. equity market. In contrast to prior studies that focus on actively managed mutual funds, we find that the risk‐adjusted returns of SR ETFs are significantly lower than those of conventional ETFs during the 2005–2020 period. Such underperformance is only observed in non‐crisis periods but not in economic crisis periods (i.e., the 2020 pandemic recession and 2008 financial turmoil). We attribute the observed underperformance of SR ETFs during the non‐crisis periods to their limited diversification of unsystematic risks resulting from various negative or positive screens employed in the funds. We also find that net fund flows of the SR ETFs are less sensitive to past negative performance than are conventional fund flows. Collectively, our findings suggest that, instead of seeking wealth maximization, socially conscious investors may choose SR ETFs to gain non‐economic utility.
Active mutual funds supply liquidity when demanding it becomes uneconomical. They tilt toward cheaper buy trades after inflows deplete their trading ideas, when trading ideas in general run low, and when they have more stocks to supply liquidity to, and their cheaper trades perform worse. Their largest trades are more likely to supply liquidity, explaining why they were not broken up. Funds perform better when they pay more for their buys and perform worse when they pay more for their sells, consistent with the implied value of the trades and the correlation between what a fund trades and what it holds.
Motivated by the ongoing debate on the interaction between fund size and fund performance, we investigate the effect of asset growth on fund performance. We explicitly measure the economic gain (loss) of being a small (large) fund by comparing the average performance of a large fund vis à vis its average performance when it was small. Our results reveal that for the U.S. actively managed equity funds, the risk-adjusted return differential amounts to 7.08% per year in favor of small funds. Moreover, we fail to identify any performance loss for a fund relative to its history unless it belongs in the top 70% of fund size. However, the documented implicit performance handicap of U.S. large equity funds is not met in funds investing outside the U.S. Our findings carry important implications for the mutual fund industry and for the fund selection process.
Social ties between mutual funds and the companies in which they invest (investees) can both facilitate information transfers and encourage favoritism. Using the investment choices of mutual funds in China, we compare investment performance of holdings in companies that are socially connected to mutual funds versus those that are not. We find that funds allocate more investment to connected investees' stocks, especially when a fund is weakly monitored. This overweighting is greater in times of poor investee performance, when the benefits of additional investment to the connected investees are high. Weakly monitored funds' preference for connected stocks hurts the returns of these funds, yielding a 6.6 percent lower annualized risk-adjusted return, relative to closely monitored funds. These results suggest that, absent sufficient monitoring, agency conflicts generated by social networks can dominate the information advantages of these networks.
JEL Classifications: G10; G11; G14.
Investors use ratings to make their investment decisions. In this paper we analyze whether the combination of qualitative and quantitative information allows the mutual funds to be identified that are able to beat their peers’. Our results show just a little evidence when we use ratings in isolation. The selection of mutual funds improves when we choose those with a positive Parent, Process and Price. Finally, the combination of Star (quantitative) and Analyst (qualitative) information as well as their pillars improves the screening of mutual funds.
This paper investigates the performance persistence of both mutual funds and hedge funds using China’s data covering the period from January 2010 to December 2019. We first use a nonparametric method to examine the performance persistence with net return and Sharpe ratio over monthly, quarterly, semiannual, and annual intervals. We first find evidence that performance persistence exists in some years for both mutual funds and hedge funds. Then we construct portfolios based on lagged one-year returns and estimate their performance. We find top-performing portfolios of hedge funds that can get significantly positive alpha while no portfolio of mutual funds can get positive alpha.
This paper examines the impact of ownership structure on Chinese mutual fund performance and market share. We focus on two dimensions of ownership structure, namely the background of the owners and the degree of ownership concentration. Using a hand-collected dataset comprising 731 observations for 94 fund management companies over the period from 2005 to 2015, we provide evidence with panel estimation shows that the government ownership ratio and government-controlled companies have a positive effect on funds’ performance. On the other hand, foreign ownership has a negative impact on performance and market share. Having a higher ownership concentration is more likely to increase the company’s market share, whereas government-controlled companies experience a negative impact on their market share.
This study investigates the voluntary disclosure practice of Serbian listed
companies and examines the contribution of company characteristics,
financial attributes, and corporate governance related factors on voluntary
disclosure practices. A voluntary disclosure index is developed in order to
evaluate the level of disclosure of 63 Serbian companies for reporting
period 2012. The analysis of the extent of voluntary disclosure in corporate
annual reports reveals that even among the most actively traded stocks on
the Belgrade Stock Exchange, there was considerable variability in the
amount of information voluntarily disclosed. Significant variables that
explain variation in voluntary disclosures ( company size, listing status and
profitability) also determine firm competitiveness. It is necessary for the
Serbian Securities Commission to proclaim a series of regulations which
specifies the content, scope, channel and timeliness of voluntary disclosure,
in order to improve the level of voluntary disclosure and consequently the
competitiveness of Serbian enterprises. This study provides an evaluation
of the extent of total voluntary disclosure and its categories in corporate
annual reports of Serbian enterprises.
In this article, I study for first time how the board of trustees’ size and independence influence the financial performance and sustainability scores of socially responsible (SR) mutual funds. The sample analyzed consists of 99 SR US domestic equity mutual funds existing in the period 2012–2018. The results obtained indicate that funds monitored by boards with a lower number of trustees and an independent chair show lower net expense ratios and better sustainability scores. In addition, smaller boards and a greater percentage of independent trustees are positively associated with the achievement of a better risk‐adjusted financial performance. Regarding SR strategies, negative screens are more likely among funds with larger and less independent boards whereas positive screens are more frequent when boards show the opposite characteristics. Another finding indicates that SR funds that implement positive screens present more industry concentrated portfolios that lead to the achievement of a more sustainable performance.
In June 2004, the SEC required mutual fund boards to disclose additional information about the inputs and processes involved in advisory contract approvals to help investors make more informed decisions and to encourage independent directors to act more independently when negotiating advisory fees. We find that CEF advisory fees are more likely to decrease after the 2004 SEC amendments, especially for those CEFs with high advisory fees and low investment performances. After the 2004 SEC amendments, CEF advisory rates decrease on average and the magnitudes of their decreases increase. We find that more board meetings and the likelihood of a decrease in advisory fees after the amendments increases with the number of board meetings. Our results are not only supported by textual analysis and type of filing downloads but are also robust to time-series placebo tests, changes in the ratios of independent directors, and funds belonging to “scandal” families. Overall, our results are consistent with the notion that the 2004 SEC amendments successfully encouraged independent fund directors to exert more effort and to act more independently in negotiating advisory fees with fund advisors.
This paper examines how board independence and director incentives in the mutual fund industry affect fund expenses, performance, and compliance. It is based on a hand-collected panel dataset of mutual fund governance characteristics from 1995 through 2004, which covers about 60% of assets listed in the CRSP mutual fund database. The results show that funds overseen by an independent chair charge fees that are 12 basis points lower and that the fraction of independent directors is associated with higher fees during the earlier part of the sample and with lower fees during the latter part. Both measures of board independence are associated with lower fund performance, although funds with higher director ownership and lower unexplained compensation charge lower fees and deliver higher returns. Fund board characteristics do not seem to affect the likelihood of litigation by regulators and shareholders. These results suggest that fund investors do not necessarily benefit from greater board independence if boards negotiate low fees without closely evaluating fund performance. In contrast, higher director ownership and relatively low compensation seem to align incentives between fund boards and investors.
Researchers disagree about the impact of board independence on firm value. The disagreement generally stems from the endogenous nature of board appointments. I add new evidence to this discussion by using a sample of closed-end funds to document the value-enhancing effects of independent boards. Using cross-sectional, difference-in-differences, and instrumental variables techniques, I address these endogeneity concerns and find consistent evidence that board independence is associated with higher firm value.
The current financial crisis is affecting the entire operations of the modern enterprise. The main objective of this study is to identify and evaluate whether the current trend of downsizing impacts Internal Controls, Internal Auditors and Internal Audit departments. We will evaluate whether ‘downsizing’ may lead to less compliance with corporate governance best practices, as well as laws and regulations or excessive risk‐taking. The Internal Audit department has a multiple role to play in today’s downsized organizational environment. Moreover, “reengineered via downsizing” Internal Audit Departments are often tasked with special projects in which they may play a role that requires the extensive application of consulting skills and competences. Internal Auditors direction towards economy, effectiveness and efficiency is a valuable input for every company that adopts change management.
Key words: Corporate Governance, Downsizing, Internal Controls, Internal Audit, Reengineering
JEL classification: D23
We study compensation contracts of individual portfolio managers using hand‐collected data of over 4,500 U.S. mutual funds. Variations in the compensation structures are broadly consistent with an optimal contracting equilibrium. The likelihood of explicit performance‐based incentives is positively correlated with the intensity of agency conflicts, as proxied by the advisor's clientele dispersion, its affiliations in the financial industry, and its ownership structure. Investor sophistication and the threat of dismissal in outsourced funds serve as substitutes for explicit performance‐based incentives. Finally, we find little evidence of differences in future performance associated with any particular compensation arrangement.
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Purpose
The fund selection process of investors in a mutual fund needs to be understood for designing better marketing strategies. Knowledge and perception about the mutual funds can affect investor’s behaviour towards information search and selection criteria during the decision process. Therefore, this study aims to examine Indian mutual fund investors under the framework of Theory of Planned Behaviour and consumer’s behaviour model.
Design/methodology/approach
The data have been collected from mutual fund investors in the National Capital Region–Delhi, India, through structured questionnaire. The collected data were examined with relevant statistical tools.
Findings
Knowledge and perception affect information search behaviour of the investor. Investors having better knowledge of mutual funds access impersonal sources of information and performance of fund affects their choice, whereas investors having lesser knowledge of mutual fund take advice of experts and select funds based on fund characteristics. Investors with better return perception for mutual funds ignore performance as selection criteria, whereas investors having poor risk perception tend to reduce their bias by accessing personal sources of information. Education and income of investor affect knowledge and perception of mutual funds.
Practical implications
The financial advisor-driven investors ignore performance as selection criteria and could lead to dissatisfaction later. Therefore, to make the industry investor driven, mutual funds need to focus on improving the knowledge of investors.
Originality/value
This paper shows the unique effect of knowledge and perception on information search behaviour of investors towards mutual funds. The knowledgeable investor selects mutual funds by understanding all risks and benefits.
Superannuation funds heavily outsource key fund functions to service providers who play a crucial role in superannuation fund operations and affecting Australians’ retirement savings. We examine the impact of related party service provider usage and trustee‐director affiliation on investment performance. We find that for‐profit funds significantly underperform when using related party service providers. The underperformance is more severe when the board is controlled by more affiliated trustee‐directors and belongs to a vertically integrated conglomerate group. Our results raise concerns about whether recent regulatory reforms increasing trustee‐directors’ duties effectively address the conflicts of interest inherent in related party service provider arrangements.
In private equity, general partners (GPs) receive fee payments from companies whose boards they control. Fees amount to $20 billion evenly distributed over time, representing over 6% of equity invested by GPs. They do not vary with business cycles, company characteristics, or GP performance. Fees vary significantly across GPs and are persistent within GPs, even after accounting for fee rebates to limited partners (LPs). GPs charging the least raise more capital postfinancial crisis and are backed by more skilled LPs. GPs increase fees prior to going public. We discuss how these results could be explained by optimal contracting and tax arbitrage.
With a generally weak investor protection environment and no governance voice in the fund management companies (FMC) to which their investment is entrusted, fund investors in China are left with the internal governance mechanisms to safeguard their interest. Using a panel data of 288 firm-year observations covering more than 98% of FMC in China from the period between 2006 and 2010, the present paper examines the corporate governance challenges confronting the fledging Chinese fund management industry by analysing how key governance settings affect the performance of the board of directors in protecting the interest of fund investors. The results show that board effectiveness can be enhanced if a listed company is the controlling shareholder. In addition, having a female CEO or board chairperson and a small-sized board may help to reduce investors’ fees. Other internal corporate governance mechanisms, such as shareholder concentration, having state-owned financial companies as controlling shareholders and board independence, are found to exhibit no significant impact on the effectiveness of FMC boards.
This study investigates the manner in which consumers make investment decisions for mutual funds. Investors report that they consider many nonperformance related variables. When investors are grouped by similarity of investment decision process, a single small group appears to be highly knowledgeable about its investments. However, most investors appear to be naive, having little knowledge of the investment strategies or financial details of their investments. Implications for mutual fund companies are discussed.
I present evidence consistent with theories that small boards of directors are more effective. Using Tobin's Q as an approximation of market valuation, I find an inverse association between board size and firm value in a sample of 452 large U.S. industrial corporations between 1984 and 1991. The result is robust to numerous controls for company size, industry membership, inside stock ownership, growth opportunities, and alternative corporate governance structures. Companies with small boards also exhibit more favorable values for financial ratios, and provide stronger CEO performance incentives from compensation and the threat of dismissal.
This study finds significant correlations between board size and profitability and between board size and solvency in a sample of small and mid-size firms. Several studies hypothesize a relationship between board size and firm financial performance. Empirical tests of the relationship exist in a few studies of large U.S. firms. We find a negative correlation between board size and profitability in small and mid-size Finnish firms. Finding a board-size effect for a new and different class of firms points towards the influence of group size on risk-taking behavior as a source of the board-size effect. A new board-size effect we report, a positive correlation between board size and firm solvency, further supports the hypothesis that board-size effects result from distortions of risk-taking behavior.
A mutual fund firm's ability to charge for marketing funds is a function of more than past financial performance. Front-end loads and annual fund marketing charges are in part determined by customer services, whether deferred marketing charges can be imposed, and financial performance. The results imply that, at least in the short run, mutual fund firms should focus relatively more on fund marketing and service-related characteristics of their funds than on financial performance. Mutual fund investors seem to demand high levels of services in exchange for high marketing charges.
This article presents a proposal for improved corporate governance that could be implemented voluntarily by business corporations and their boards, without relying on changes in laws, regulations, court decisions, or shareholder behavior. The central elements of the proposal involve: limiting board size; setting a two-to-one ratio of independent to inside directors; increasing the time directors spend on board matters, including an annual two or three day strategy session; annual evaluation of the CEO by the outside directors; selecting a lead outside director; improving the flow of information to the board; systematically reviewing corporate and management performance against goals; creating an annual forum for the board to meet with major shareholders; and providing a special report to shareholders, and access to the proxy statement for major shareholders, in the event of unsatisfactory long-term results.
This paper evaluates the economies of scale and scope in the French mutual funds (SICAV) industry. This segment of the financial sector offers the unique characteristic that some firms specialize, while others supply several products. The results suggest economies of scale and scope for small institutions and diseconomies for larger firms. An appropriate size for a diversified company is in the range of FF 2.9 billion.
We investigate the relation between Tobin's Q and the structure of equity ownership for a sample of 1,173 firms for 1976 and 1,093 firms for 1986. We find a significant curvilinear relation between Q and the fraction of common stock owned by corporate insiders. The curve slopes upward until insider ownership reaches approximately 40% to 50% and then slopes slightly downward. We also find a significant positive relation between Q and the fraction of shares owned by institutional investors. The results are consistent with the hypothesis that corporate value is a function of the structure of equity ownership.
This paper examines the relation between the monitoring of CEOs by inside and outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the probability of a resignation for companies with outsider-dominated boards than for companies with insider-dominated boards. This result does not appear to be a function of ownership effects, size effects, or industry effects. Unexpected stock returns on days when resignations are announced are consistent with the view that directors increase firm value by removing bad management.
We investigate the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. In a 1980 cross-section of 371 Fortune 500 firms, we find evidence of a significant nonmonotonic relationship. Tobin's Q first increases, then declines, and finally rises slightly as ownership by the board of directors rises. For older firms, there is evidence that Q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder.
This brief is divided into four parts. Part one provides a basic description of the agricultural production process as a dynamic flow, producing not only commodities but environmental goods and "bads"(damages). Part two discusses the research agendas that have influenced this production process, and the conflicts between traditional commodity oriented research and the newer environmental research agenda. Part three takes up the common ground uniting these two agendas: a concern for the uses of land and the effects of this use on both commodity and environmental flows. Part four offers some specific recommendations for reforms in land policy and targeting at the national level, the farm level, and the implications of these reforms for agricultural research systems.
The potential usex of public resources and powers to improve the economic stuius of economic groups (such as industries and occupations) are analyzed to provide a scheme of the demand for regulation. The characteristics of the political process which allow relatively small groups to obtain such regulation is then sketched lo provide elemenls of a theory of supply of regulation. A variety of empirical evidence and illustration is also presented. W The state—the machinery and power of the state—is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries. That political juggernaut, the petroleum industry, is an immense consumer of political benefits, and simultaneously the underwriters of marine insurance have their more modest repast. The central tasks of the theory of economic regulation are to explain who will receive the
This paper examines the relationship between top management compensation and corporate performance in public utilities. Previous researchers have argued that incentives for profitability are not needed in public utilities, since regulation provides assured profits. Earlier empirical work supports this claim. We reexamine this issue and provide several methodological improvements over prior studies. Our findings are consistent with the hypothesis that compensation packages for senior managers in public utilities are constructed to provide them with incentives to maximize stockholders' wealth.
Using a sample free of survivor bias, the author demonstrates that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns. Darryll Hendricks, Jayendu Patel, and Richard Zeckhauser's (1993) 'hot hands' result is mostly driven by the one-year momentum effect of Narasimham Jegadeesh and Sheridan Titman (1993), but individual funds do not earn higher returns from following the momentum strategy in stocks. The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers. Copyright 1997 by American Finance Association.
This paper develops a model in which the effectiveness of the board's monitoring of the CEO depends on the board's structure or composition. The independence of new directors is determined through a bargaining process between the existing directors and the CEO. The CEO's bargaining position, and thus his influence over the board-selection process, depends on an updated estimate of the CEO's ability based on his prior performance. Many empirical findings about board structure and performance arise as equilibrium phenomena in this model. We also explore the implications of this model for proposed regulations of corporate governance structures.
Firm productivity and board committee structure. Unpublished manuscript. Stern School of Business
- A Klein
Klein, A., 1995. Firm productivity and board committee structure. Unpublished manuscript. Stern School of Business, New York University, New York.
The Economics of Mutual Fund Markets: Competition versus Regulation Corporate governance and the board of directors: performance effects of changes in board composition
- W Baumol
- S Gotdfeld
- L Gordon
- F Koehn
Baumol, W., Gotdfeld, S., Gordon, L., Koehn, F., 1990. The Economics of Mutual Fund Markets: Competition versus Regulation. Kluwer Academic Publishers, Boston. Baysinger, R., Butler, H., 1985. Corporate governance and the board of directors: performance effects of changes in board composition. Journal of Law, Economics and Organization 1, 10t-124.
Organizational structure and financial performance. Unpub-lished manuscript
- R Holthausen
- D Larcker
Holthausen, R., Larcker, D., 1993. Organizational structure and financial performance. Unpub-lished manuscript. Wharton School, University of Pennsylvania, Philadelphia.
Issues and approaches in considering investment advisory and distribution arrange-ments. Unpublished manuscript, Investment Company Institute Director's Conference The theory of economic regulation
- T Smith
Smith, T., 1994. Issues and approaches in considering investment advisory and distribution arrange-ments. Unpublished manuscript, Investment Company Institute Director's Conference, Washington, DC. Stigler, G., 1971. The theory of economic regulation. Bell Journal of Economics 2, 3-21.
To load or not to load? Financial Analysts Journal
- J Kihn
Kihn, J., 1996. To load or not to load? Financial Analysts Journal 28-36.