Ankur Pareek

Information Networks: Implications for Mutual Fund Trading Behavior and Stock Returns

This paper examines the effect of information networks on the trading behavior of mutual funds and on stock returns. An information or stock ownership linkage between two mutual funds is defined by large positions in the same stock. Mutual funds trade together with other funds in their information network after controlling for the overall trading behavior of the mutual fund sector. The effect is robust and cannot be explained by style investing or geographic location. The paper also examines the effect of the structure of information networks on stock returns and stock volatility. Using network density as a measure for the speed of information diffusion in a network of investors, I find that stocks with a lower network density demonstrate stronger return momentum over medium horizons and also show a delayed response to the market-wide information. The evidence is consistent with the gradual information diffusion model of Hong and Stein (1999). Finally, I provide empirical evidence in support of recent theoretical models that study the asset pricing implications of social networks. I show that centralized information networks lead to a higher volatility of individual stocks in the cross-section and also explain the variation in average stock idiosyncratic volatility over time.

Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently

Among high active share portfolios—whose holdings differ substantially from their benchmark—only those with patient investment strategies (with holding durations of over two years) on average outperform, over 2% per year. Funds trading frequently generally underperform, including those with high active share. Among patient funds, separating closet index from high active share funds matters, as low active share funds on average underperform even with patient strategies. Our results suggest that U.S. equity markets provide opportunities for longer-term active managers, perhaps because of the limited arbitrage capital devoted to patient and active investment strategies.

Limited Attention and Portfolio Choice: The Impact of Attention Allocation on Mutual Fund Performance

This study proposes that the performance of mutual fund managers is linked to how efficiently they allocate attention across assets in their investment set. Motivated by existing models of optimal portfolio choice and rational inattention, we posit that the efficiency of attention allocation increases when a manager chooses larger (smaller) active positions in assets which need more (less) information acquisition effort to resolve uncertainty about future payoffs. We show that the efficiency of attention allocation has a significantly positive impact on future fund performance. Efficient attention allocation has a lesser impact on performance as the total demands on a manager’s limited attention increase.

Short-Term Institutions, Analyst Recommendations, and Mispricing

This paper documents how the interaction between short-term investors and analyst recommendations relates to a speculative component in stock prices that results in temporary overvaluation with predictable, large price reversals. In particular, stocks held by short-term institutions with optimistic analyst recommendations have large past outperformance, followed by large negative future alphas. Our results are robust to using Russell 2000 index reconstitutions to capture exogenous changes in institutional ownership, short-term trading and analyst coverage, and are stronger among stocks that are harder to short, consistent with limited arbitrage.We study whether the presence of short-term investors is related to stock prices using a new measure of stock holding duration. First, we find that holding durations have been stable and, if anything, slightly lengthened over time. Second, we document that the presence of short-term investors is related to temporary price distortions that generate stock return predictability, consistent with a speculative component in stock prices. As short-term investors move into (out of) stocks, their prices tend to go up (down) relative to fundamentals. As the presence of short-term investors is strongly mean-reverting, this creates a predictable pattern in returns.

Do Criminal Politicians Affect Firm Investment and Value? Evidence from a Regression Discontinuity Approach

We provide evidence on the effects of criminal/corrupt politicians on firm value and investments. Using a regression discontinuity approach, we focus on close elections to establish a causal link between election of criminal-politicians and firms’ value and investment decisions. We utilize unique datasets on the criminal background of Indian politicians and details on investment projects in their districts. Election of criminal-politicians leads to lower election-period and project-announcement stock-market returns for local private-sector firms. There is sharp decline in total investment by private-sector firms in criminal-politician districts: Interestingly, the decline in private-sector investment is offset by a roughly equivalent increase in investment by state-owned firms. Corrupt politicians are less destructive when the overall corruption in the state is lower and when they belong to a political party that is in power at the state or national level.

Stock Duration, Analyst Recommendations, and Overvaluation

This paper documents how the interaction between short-term investors and analyst recommendations relates to a speculative component in stock prices that results in temporary overvaluation with predictable, large price reversals. In particular, stocks held by short-term institutions with optimistic analyst recommendations have large past outperformance, followed by large negative future alphas. Our results are robust to using Russell 2000 index reconstitutions to capture exogenous changes in institutional ownership, short-term trading and analyst coverage, and are stronger among stocks that are harder to short, consistent with limited arbitrage.We study whether the presence of short-term investors is related to stock prices using a new measure of stock holding duration. First, we find that holding durations have been stable and, if anything, slightly lengthened over time. Second, we document that the presence of short-term investors is related to temporary price distortions that generate stock return predictability, consistent with a speculative component in stock prices. As short-term investors move into (out of) stocks, their prices tend to go up (down) relative to fundamentals. As the presence of short-term investors is strongly mean-reverting, this creates a predictable pattern in returns.

The Business Group Advantage in Mutual Funds: Evidence from India

Most explanations for the dominance of business groups in emerging markets rely on the idea that interactions between divisions within the group generate value that stand alone firms do not have access to. Yet despite the theoretical importance of these interactions, we have little evidence quantifying their existence. We document that sharing information across divisions appears to be one important type of interaction. We hypothesize that business group firms likely generate valuable information about the future performance of their industry, and can therefore help the asset management company within the group by sharing this information. Consistent with this hypothesis, we find that business group owned mutual funds earn substantially more on their investments in industries where the group has significant real operations. On average, business group mutual fund owned stocks in related industries outperform business group mutual fund owned stocks in unrelated industries by 6 percent per year; this out-performance increases to 16 percent per year in over-weighted stocks. Our results suggest that information sharing within business groups constitute an important source of value. ∗We thank Shawn Cole, Todd Gormley, Jeremy Tobacman, Shing-Yi Wang and participants at the Indian School of Business Center for Analytical Finance conference for comments. We thank Matt Cox and Jaclyn Carney at Morningstar for help with the Morningstar Direct data, and Minkwang Jang, Maria Gao, Mengshu Shen, Jason Tian for research assistance. All errors are our own.

Stock Duration, Analysts Recommendations, and Misvaluation

This paper documents how the interaction between short-term investors and analyst recommendations relates to a speculative component in stock prices that results in temporary overvaluation with predictable, large price reversals. In particular, stocks held by short-term institutions with optimistic analyst recommendations have large past outperformance, followed by large negative future alphas. Our results are robust to using Russell 2000 index reconstitutions to capture exogenous changes in institutional ownership, short-term trading and analyst coverage, and are stronger among stocks that are harder to short, consistent with limited arbitrage.We study whether the presence of short-term investors is related to stock prices using a new measure of stock holding duration. First, we find that holding durations have been stable and, if anything, slightly lengthened over time. Second, we document that the presence of short-term investors is related to temporary price distortions that generate stock return predictability, consistent with a speculative component in stock prices. As short-term investors move into (out of) stocks, their prices tend to go up (down) relative to fundamentals. As the presence of short-term investors is strongly mean-reverting, this creates a predictable pattern in returns.