Liquidity Provision and the Cross-Section of Hedge Fund Returns, 2016, Management Science, accepted. (Internet Appendix) (List of ANcerno client-manager pairs classified as hedge funds)
I investigate whether hedge funds that supply liquidity earn superior returns. Using transaction data, I find that hedge funds following short-term contrarian strategies (i.e., liquidity-suppliers) earn significantly higher returns on their equity trades and holdings. Similarly, using commercial databases, I find that hedge funds with greater exposure to a liquidity-provision factor earn significantly higher excess returns and Sharpe ratios. The superior performance of liquidity-supplying hedge funds arises from strategies that are more complex than mechanical short-term reversal strategies. For example, among stocks with similar past returns, liquidity-supplying funds are more likely to trade against stocks heavily traded by constrained mutual funds and less likely to trade against stocks heavily traded from unconstrained mutual funds. The outperformance of liquidity-supplying funds is also concentrated in periods of low funding liquidity, suggesting that less-binding financial constraints contribute to their superior returns.
Crowdsourcing — when a task normally performed by employees is outsourced to a large network of people via an open call — is making inroads into the investment research industry. We shed light on this new phenomenon by examining the value of crowdsourced earnings forecasts. Our sample includes 51,012 forecasts provided by Estimize, an open platform that solicits and reports forecasts from over 3,000 contributors. We find that Estimize forecasts are incrementally useful in forecasting earnings and measuring the market’s expectations of earnings. Our results are stronger when the number of Estimize contributors is larger, consistent with the benefits of crowdsourcing increasing with the size of the crowd. Finally, Estimize consensus revisions generate significant two-day size-adjusted returns. The combined evidence suggests that crowdsourced forecasts are a useful, supplementary source of information in capital markets.
Access to Management and the Informativeness of Analyst Research (with T. Clifton Green, Stanimir Markov, and Musa Subasi), 2014, Journal of Financial Economics 114, 239-255.
We examine whether access to management at broker-hosted investor conferences leads to more informative research by analysts. We find analyst recommendation changes have larger immediate price impacts when the analyst’s firm has a conference-hosting relationship with the company. The effect increases with hosting frequency and is strongest in the days following the conference. Conference-hosting brokers also issue more informative, accurate, and timely earnings forecasts than non-hosts. Our findings suggest that access to management remains an important source of analysts’ informational advantage in the post-Regulation Fair Disclosure world.
Broker-Hosted Investor Conferences (with T. Clifton Green, Stanimir Markov, and Musa
Subasi), 2014, Journal of Accounting and Economics 58, 142-166.
Industry-Based Style Investing (with Qing Tong), 2014, Journal of Financial Markets 19, 110-130.
Motivated by the style-investing model of Barberis and Shleifer (2003), we examine the industry-wide investment decisions of retail investors. We find that retail investor industry demand is highly correlated and strongly related to past industry returns. Moreover, industries heavily bought by retail investors over the past year significantly underperform industries heavily sold over the subsequent year. Similarly, stocks in industries heavily bought by retail investors underperform stocks in industries heavily sold, even after controlling for firm-level demand. Our results suggests that industry-wide categorization influences the investment decisions of retail investors and has a significant impact on asset prices.
Company Name Fluency, Investor Recognition, and Firm Value (with T. Clifton Green), 2013, Journal of Financial Economics 109, 813-834. (Company Name Fluency Data) (Mutual Fund Fluency Data)
Research from psychology suggests that people evaluate fluent stimuli more favorably than similar information that is harder to process. Consistent with fluency affecting investment decisions, we find that companies with short, easy to pronounce names have higher breadth of ownership, greater share turnover, lower transaction price impacts, and higher valuation ratios. Corporate name changes increase fluency on average, and fluency improving name changes are associated with increases in breadth of ownership, liquidity, and firm value. Name fluency also affects other investment decisions, with fluently named closed-end funds trading at smaller discounts and fluent mutual funds attracting greater fund flows.
Trading by Index Funds and Liquidity Provision Around S&P 500 Index
Additions (with T. Clifton Green), 2011, Journal
of Financial Markets 14, 605-624
Active Working Papers
It Pays to be Extraverted: CEO Personality and Career Outcomes (with T. Clifton Green and Brandon Lock), May 2016
Search Costs and Revealed Preferences for Idiosyncratic Volatility (with Christopher Clifford, Jon Fulkerson, and Bradford Jordan), November 2016
Psychology research identifies extraversion as the personality trait most closely associated with leadership. We examine executive extraversion, as measured by speech patterns during conference calls, and find extraverts experience significant career benefits. Specifically, controlling for executive and firm characteristics, including firm fixed effects, we find that extraverted CFOs and CEOs earn 6-11% higher salaries. Extraverted CFOs are more likely to be promoted to CEO, and extraverts become top executives at a younger age. Extraverted CEOs also serve on more outside boards and hold directorships at larger firms. Our findings highlight a previously unobservable managerial trait that explains executive career outcomes.
We use capital flows into and out of mutual funds to infer investors' preferences towards idiosyncratic volatility (IV). We find investors are more likely to both purchase and redeem funds with high IV. This pattern is concentrated among funds in the top quintile of IV, and it is stronger among retail investors, non-incumbent investors, and funds with lower visibility. Our results suggest that limited attention and search costs contribute to investors' preference for IV when trading. Our findings that IV results in increased visibility and liquidity may also help explain the puzzling negative relationship between IV and equity returns.
Does Crowdsourced Research Discipline Sell-Side Analysts? (with Stanimir Markov and Michael Wolfe), January 2017
We examine whether increased competition stemming from technological innovation disciplines sell-side analysts. We document a decline in short-term forecast bias for firms added to Estimize, an open platform that crowdsources short-term earnings forecasts, relative to matched control firms; this decline is greater when (1) existing sell-side competition is smaller, (2) earnings uncertainty is higher, and (3) Estimize coverage is less biased and more accurate. We also document an increase in short-term forecast accuracy and representativeness. Finally, we find no change in bias for longer-horizon forecasts or recommendations, suggesting competition from Estimize rather than broad economic forces drives our results.