Anna Agapova

Does Regulation Fair Disclosure Reduce the Information Quality of Managerial Guidance

We examine an effect of Regulation Fair Disclosure (Reg FD) on voluntary public managerial guidance information quality. Results suggest that the information quality of public guidance has not deteriorated after Reg FD. We also examine separately the effect of Reg FD on information efficiency before earnings releases for firms that provide public managerial guidance and those that do not. We find that when we control for the impact of Reg FD on firm characteristics, information efficiency deteriorates for firms that do not provide public guidance and for new guiders, while it does not change for firms that continue issuing public guidance after Reg FD.

Are Vanguard’s ETFs Cannibalizing the Firm’s Index Funds?

Existing literature on ETFs and conventional index mutual funds suggests that the two fund types are substitutes for each other in terms of attracting investors’ money. Vanguard is an industry-leading index fund provider that offers both conventional index mutual funds and ETFs. The question is whether Vanguard experiences a substitution effect between its index funds and ETFs to the same degree as is observed in the industry in general. The examination of the substitutability of the two fund types can help explain Vanguard’s decision to offer ETFs that could cannibalize the firm’s existing products. Results of the article show that contrary to the initial expectations, Vanguard’s ETFs and corresponding index funds are not substitutes but rather complements. The flows of ETFs and index funds positively affect each other. Positive spillover effects, such as ETF tax efficiency, may help explain the synergy between Vanguard index products. The results can help fund families take advantage of similar efficiency spillover effects when structuring new products.

Chicken Little Gets It Wrong Again

Many investors see little opportunity for active portfolio managers to exploit relative returns in environments with high return correlation. Contrary to what current-day Chicken Littles believe, the authors empirically find a positive relation between the S&P 500’s average constituent stock relative-return volatility and its average between-constituent return correlation. Moreover, the S&P 500’s index-return variance, average between-constituent return correlation, average constituent relative-return variance, and average constituent residual-return variance are all positively related to a statistically significant degree. The authors also provide a theoretical foundation for these empirical findings.

Market Diversity and the Performance of ActivelyManaged Portfolios

Agapova, Ferguson, and Greene examine a theoretically motivated measure of the “size effect” known as market diversity and link it to the relative returns of institutional actively managed portfolios. Market diversity reflects how disperse or concentrated capital is across firms in the market, with changes in market diversity reflecting movement of capital between relatively large firms to relatively small firms. Changes in market diversity explain a statistically and economically significant amount of variation in the relative returns of actively managed institutional large-cap strategies. The authors estimate that an increase (decrease) in market diversity of 1% leads to an average increase (decrease) in relative returns of approximately 30 basis points, with higher tracking error strategies showing relatively more sensitivity. They find that another measure of the size effect, the Fama–French small-minus-big factor, explains less of the variation in actively managed large-cap strategies’ relative returns and is rejected in favor of changes in market diversity as the underlying explanatory variable for actively managed strategies’ relative returns. The authors suggest that market diversity provides academics and practitioners an important measure of market conditions when evaluating the performance of actively managed portfolios.

A Continuous Return Model for the Low-Volatility andLow-Beta Anomalies

This study shows that a “rational,” capital asset pricing model (CAPM) type of positive relationship between short-horizon expected arithmetic return and risk can lead to a negative long-horizon relationship between compound annual return and risk (whether risk is measured by volatility or beta). This result follows from the stochastic portfolio theory relationship that a stock’s growth rate is less than its expected arithmetic return by approximately one-half its variance of return. The negative long-horizon relationships between return mean and volatility/beta often have been noted and characterized as the low-volatility and low-beta anomalies. Thus, these characterizations may be problematic.