Laboring in capital

Kevin Lewis

October 23, 2017

Hedge Fund Managers With Psychopathic Tendencies Make for Worse Investors
Leanne ten Brinke, Aimee Kish & Dacher Keltner
Personality and Social Psychology Bulletin, forthcoming


It is widely assumed that psychopathic personality traits promote success in high-powered, competitive contexts such as financial investment. By contrast, empirical studies find that psychopathic leaders can be charming and persuasive, but poor performers who mismanage, bully, and engage in unethical behavior. By coding nonverbal behaviors displayed in semistructured interviews, we identified the psychopathic, Machiavellian, and narcissistic tendencies in 101 hedge fund managers, and examined whether these traits were associated with financial performance over the course of 10 diverse years of economic volatility (2005-2015). Managers with greater psychopathic tendencies produced lower absolute returns than their less psychopathic peers, and managers with greater narcissistic traits produced decreased risk-adjusted returns. The discussion focuses on the costs of Dark Triad traits in financial investment, and organizational leadership more generally.

Adjusting to the Information Environment: News Tangibility and Mutual Fund Performance
Oleg Chuprinin, Sérgio Gaspar & Massimo Massa
Management Science, forthcoming


We study the relation between mutual funds’ performance and shocks to the public information environment of their investments. For each stock, we distinguish between quantitative, or tangible, news (expressed with numeric characters) and qualitative news (expressed as verbal content). We find that funds that trade more actively in response to changes in the stocks’ information tangibility earn higher risk-adjusted returns. Funds that are particularly sensitive to such fluctuations have smaller managerial teams and employ managers who are more focused. Overall, our evidence suggests that signals associated with changes in the type of public information constitute a channel of value creation in asset management.

A Tough Act to Follow: Contrast Effects In Financial Markets
Samuel Hartzmark & Kelly Shue
NBER Working Paper, September 2017


A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday’s earnings surprise was bad and less impressive if yesterday’s surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by a key alternative explanation involving information transmission from previous earnings announcements.

Dodd-Franking the Hedge Funds
Douglas Cumming, Na Dai & Sofia Johan
Journal of Banking and Finance, forthcoming


This paper analyzes hedge fund performance, risk, and fund flows before and after the implementation of the Dodd-Frank Act. The data indicates that, relative to non-US hedge funds, US hedge funds that are regulated under Dodd-Frank have lower fund alphas in the post-Dodd-Frank implementation period, both statistically and economically significant, while the evidence on its effect on risk (standard deviations and idiosyncratic risk) is mixed. We find evidence that there is more fund outflow (or less fund inflow) for certain US hedge fund strategies after the implementation of Dodd-Frank. We show some differences in these findings dependent on fund size and strategy. The findings are robust to difference-in-differences analyses comparing US to non-US funds.

The Big Short: Short Selling Activity and Predictability in House Prices
Pedro Saffi & Carles Vergara-Alert
Real Estate Economics, forthcoming


We study how investors can use financial securities to speculate on the decrease of house prices. Unlike most asset types, houses are subject to high trading frictions and cannot be sold short directly. Using U.S. equity lending data from 2006 through 2013, we find evidence that an increase in the short selling activity of real estate investment trusts (REITs) forecasts a decrease in house prices in the subsequent month. The magnitude and significance of this effect vary with the geographical location of the REITs' underlying properties and with the housing cycle.

Maxing Out Globally: Individualism, Investor Attention, and the Cross Section of Expected Stock Returns
Yong-Ho Cheon & Kuan-Hui Lee
Management Science, forthcoming


We examine the role of cultural difference in the pricing of positive extreme returns (MAX) for 47,000 stocks from 42 countries from 1990 to 2012. We find that investors overpay for stocks with high MAX and that MAX-premium, the spread from long-short strategy based on low- and high-MAX stocks, is both statistically and economically significant worldwide. The negative relation between idiosyncratic volatility and expected returns, or idiosyncratic volatility puzzle, exists only for stocks with high MAX, implying that the puzzle may arise from the overpayment for stocks with high MAX and the subsequent return reversal. Consistent with the expectation that overpayment will be stronger for overconfident investors, the MAX-premium is larger in countries with high individualism index (IDV) than it is in countries with low IDV. Furthermore, we find the MAX-premium to be larger and the difference in the MAX-premium between high- and low-IDV countries to be more pronounced when VIX and volatility are high. Our findings suggest that the attention-grabbing feature of stocks with high MAX affects the pricing of extreme positive returns asymmetrically depending on the cultural differences across countries.

Are the Risk Attitudes of Professional Investors Affected by Personal Catastrophic Experiences?
Gennaro Bernile et al.
University of Miami Working Paper, August 2017


We adopt a novel empirical approach to show that the risk attitudes of professional investors are affected by their catastrophic experiences – even for catastrophes with no economic impact on these investors or their portfolio firms. We study the portfolio risk of U.S.-based mutual funds that invest outside the U.S. before and after fund managers personally experience severe natural disasters. Using differences-in-differences, we compare managers in disaster versus non-disaster counties matched on prior disaster probability and fund characteristics. We find that monthly fund return volatility decreases by roughly 60 bps in year 1 and the effect disappears by year 3. Systematic risk drives the results. Additional analyses rule out wealth effects (using disasters with no damages) and managerial agency, skill, and catering explanations.

Performance Isn't Everything: Personal Characteristics and Career Outcomes of Mutual Fund Managers
Brad Barber, Anna Scherbina & Bernd Schlusche
University of California Working Paper, June 2017


We assess mutual fund manager career outcomes. We find that, although career outcomes are largely determined by past performance, measured by returns and fund flows, personal attributes also factor in. All else equal, female managers are less likely to be promoted and have shorter tenures than male fund managers. This finding applies to a greater extent to women who co-manage funds with other managers, which suggests that working in teams negatively affects women's careers when compared to men's. Moreover, we show that, all else equal, younger managers, U.S.-educated managers, and managers who attended elite schools experience better career outcomes than otherwise similar managers.

Designated Market Makers Still Matter: Evidence from Two Natural Experiments
Adam Clark-Joseph, Mao Ye & Chao Zi
Journal of Financial Economics, forthcoming


Independent technological glitches forced two separate trading halts on different U.S. exchanges during the week of July 6, 2015. During each halt, all other exchanges remained open. We exploit exogenous variation provided by this unprecedented coincidence, in conjunction with a proprietary data set, to identify the causal impact of Designated Market Maker (DMM) participation on liquidity. When the voluntary liquidity providers on one exchange were removed, liquidity remained unchanged; when DMMs were removed, liquidity decreased market-wide. We find evidence consistent with the idea that these DMMs, despite facing only mild formal obligations, significantly improve liquidity in the modern electronic marketplace.

Investor Conferences, Firm Visibility, and Stock Liquidity
Paul Brockman, Musa Subasi & Cihan Uzmanoglu
Financial Review, November 2017, Pages 661–699


We examine the influence of investor conferences on firms’ stock liquidity. We find that firms participating in conferences experience a 1.4% to 2.8% increase in stock liquidity compared to nonconference firms. Consistent with investor conferences improving firm visibility, the increase in liquidity is larger for firms with low pre-conference visibility and varies predictably with conference characteristics that affect the ability of investors to revise their beliefs about the firm. However, for firms with a large investor base and high visibility, conference participation is associated with a decline in stock liquidity, consistent with investor conferences exacerbating the information asymmetry among investors.

The Twilight Zone: OTC Regulatory Regimes and Market Quality
Ulf Brüggemann et al.
Review of Financial Studies, forthcoming


Studying a comprehensive sample of stocks from the U.S. OTC market, we show that this market is a large and diverse trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We exploit this institutional richness to show that OTC firms subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: lowering regulatory requirements reduces the compliance burden for smaller firms, but it also reduces market quality.

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