AbstractsBusiness Management & Administration

Essays on Size Management, Trading, and Managerial Replacement Behaviors in U.S. Mutual Funds

by Kian Ming Tan

Institution: University of New South Wales
Department: Australian School of Business
Year: 2014
Record ID: 1033409
Full text PDF: http://handle.unsw.edu.au/1959.4/53890


This dissertation examines three essays on U.S. mutual funds, focusing on mutual fund behaviors in managing fund size, trading on firms affected by credit events, and the replacement of fund managers. The first project introduces a new antecedent variable to the literature on performance persistence: mutual fund families’ ability to adopt strategies to manage fund size across changes in the information environment. With mutual fund families using marketing and distribution expenses as tools to manage fund size, this study finds that higher 12b-1 fees are associated with lower subsequent performance and money flows, but only in the post-2000 period, after the Regulation Fair Disclosure was introduced to remove large fund families’ preferential access to information. The findings are not driven by funds’ fee-setting activities, alternative mechanisms to managing fund size such as fund closures to new investment, or differences in distribution fee structures. The second project examines how local and distant mutual funds trade on firms affected by credit events such as loan covenant violations. This study finds local investors (i.e., local fund managers) achieve positive abnormal stock returns around covenant violation periods. Local investors appear to adjust their holdings at least three months prior to covenant violations and such actions are associated with higher fund performance. To identify possible information channels utilized by local investors, this study finds evidence of local investors’ ability to mimic insider trades, but they do not appear to benefit from their involvement in syndicated loan networks. The overall findings suggest that local investors benefit from their geographic proximity to firms affected by credit events. The third project examines managerial replacement decisions made by mutual fund families. Using a unique dataset of 5,242 managerial replacement events from 1990 to 2011, this study finds that managers of funds that are ranked at the bottom of fund families in terms of performance and fund flows are more likely to be replaced. More importantly, the replacement of top-performing managers generates negative spillover effects (for both performance and flows) on other funds in the family. Further tests show that the replacement of bottom-performing managers explains fund families’ future performance and money flows, suggesting an economic value to the monitoring activities of mutual fund families.