Conrad S. Ciccotello

Equity fund size and growth: Implications for performance and selection

Should individuals choose the largest or smallest equity funds for investment? This study explores the relationship of equity fund size to performance. Historical returns of large funds are found to be superior to their smaller peers. Yesterdays best performing funds tend to become todays largest funds as individuals invest heavily in response to the communications about the funds past success. But the findings suggest that, once large, equity funds do not outperform their peers. Especially for funds in aggressive growth objectives, the advantages of being small appear to outweigh the disadvantages. For individual investors with aggressive growth objectives, a strategy of investing in smaller funds may thus be wealth maximizing.

Barriers to professional entry: how effective is the 150-hour rule?

Abstract Policy debates about the 150-hour rule have taken place without information regarding the marginal impacts that education has on CPA exam success. We find that education is a relatively weak input. An increase from the traditional undergraduate requirement of 128 credit hours to 150 hours is equivalent to a four-percentile increment in a candidates mathematics aptitude. Among inputs that might be more direct substitutes, we observe that the “extra” 22 hours is offset by two-thirds of a review course on one exam section. Our results explain why several states have recently adopted the 120/150 rule, which removes the 150-hour constraint from the exam. Since the CPA exam will be soon changing to address a broader range of competencies, the results of this study also provide a baseline for policy makers to assess the impact of educational requirements on future entry.

Research and Development Alliances: Evidence from a Federal Contracts Repository*

This article examines 582 cooperative research and development agreements (CRDAs) between federal (Air Force) agencies and other partners. Those CRDAs that exchange technology in novel phases of development tend to be long in duration relative to agreements that share mature technology. While novel projects could just take longer to complete, the findings also suggest that holdup risks increase in novelty. The geographic proximity of partners also affects CRDA duration positively, which is consistent with higher levels of tacit technology exchange. Repeat CRDAs tend to be shorter in duration, which is evidence of reputation effects. Duration of CRDAs decreases over time, which supports the argument that organizational form familiarity reduces the risks of negotiating agreements. In addition, CRDAs complement other modes of governance and methods to finance innovation. Cooperative research and development agreements with for‐profit partners are nearly 50 percent shorter than those with nonprofit partners. Venture‐capital‐backed partners tend to enter short‐duration CRDAs that share exploratory technology and envision a particular product.

Contracts between managers and investors: a study of master limited partnership agreements

Abstract We analyze a sample of 119 master limited partnership agreements to examine the linkages between the contractual design and performance of organizations. Consistent with either efficient self-selection or focus arguments, partnerships that contractually limit their scope of operations tend to have superior industry-adjusted operating performance. We also find that contracting can substitute for equity ownership as a control mechanism. Partnerships with agreements unfavorable to investors tend to have higher proportions of insider equity ownership, compared to those with agreements more protective of investors.

An investigation of the consistency of financial advice offered by web-based sources

Abstract Individuals increasingly rely on web-based sources for financial advice. But does the advice you get depend on the site you visit? Relying on standardized input data from three different family scenarios, we observe that the variation in advice across web-sites increases with client input complexity. Web advice dispersion also differs in magnitude across financial planning domains such as insurance, investments, retirement, income tax, and estate tax. ‘Live advisor’ financial solutions, however, are not always more consistent than those available on the web. Human advice varies less with client complexity, but in certain planning domains web advice has lower dispersion. The results suggest that client characteristics and planning domains matter in the development of efficient distribution mechanisms for financial advice.

Matching Organizational Structure with Firm Attributes: A Study of Master Limited Partnerships

To create value and reduce agency costs, firms adopt available organizational structures that match their attributes. This paper studies the characteristics of firms that choose to become master limited partnerships (MLPs). The MLP sample is dominated by firms in low-growth industries that have highly focused operations and superior profitability compared to their industry peers. After becoming an MLP, sample firms reduce capital expenditures and increase cash distributions, taking advantage of their focus, profitability, and status as non-taxable entities. A subsample of MLPs subsequently change back to corporate form. After becoming corporations, these firms reverse course by cutting cash distributions and increasing capital spending. This cycle demonstrates how firms restructure to adopt organizational forms that best fit their needs.

The Thrift IPO as the First Stage of its Subsequent Sale

Over one-third of the thrifts that had an initial public offering (IPO) of stock between 1988 and 1992 were acquired within five years of the IPO. We compare the thrifts acquired as public firms to (1) those that go public and remain independent and (2) those that sell themselves privately via merger conversion. Prior to the IPO, publicly acquired thrifts have low risk relative to independent thrifts; a reflection of differing motivations for going public—grooming the firm for sale versus continued growth. Publicly acquired thrifts are over twice the size of privately sold thrifts, suggesting that the costs of going public are a factor in deciding whether to sell the firm privately or publicly.

Board Structure Mandates: Consequences for Director Location and Financial Reporting

We examine how the director independence mandates of the Sarbanes–Oxley Act (SOX) and related reforms affected board geography and the quality of financial reporting. Using 1998–2006 data on the residential addresses of individual directors, we document that the geographic proximity to headquarters of audit committees and other monitoring committees declined upon implementation of the mandates. The decrease in proximity was especially large for those firms that were both SOX noncompliant and supply constrained in local director labor markets at the time the reforms were enacted. Moreover, firms with larger SOX-related losses of director proximity experienced significantly greater post-SOX declines in earnings quality. Our findings therefore suggest that, for some firms, the director independence mandates had unintended consequences for financial reporting quality. Data are available at https://doi.org/10.1287/mnsc.2017.2736. This paper was accepted by Wei Jiang, finance.

Why Financial Institutions Matter: The Case of Energy Infrastructure MLPs

Institutional investors entered the Master Limited Partnership (MLP) space in 2001 with the Kinder Morgan offering of I‐share units. In the ten years that have passed since then, the number of MLPs has quadrupled, and their total market capitalization has increased tenfold. When compared to the MLPs of the 1980s, todays MLP are more focused both in terms of operations and distribution policy. After its birth in 1981, the MLP spread to over 30 different industries. But thanks in large part to tax law changes in 1987 that have helped limit MLPs to natural resource sectors, companies adopting the MLP structure since then have been concentrated in energy, and especially in energy infrastructure. And whereas distribution policy varied considerably among the early MLPs, todays MLPs uniformly pay out a large majority of their distributable cash flow. But to maintain or expand existing energy infrastructure while paying out most of their cash from operations, many MLPs require significant amounts of new capital. To help meet this ongoing funding requirement, new kinds of institutional intermediaries such as closed‐end C‐Corporation investment companies have emerged to provide capital to MLPs in the form of direct placements that offer flexibility with regard to offer sizing and timing. Since 2004, the total value of such direct placements of MLP units has exceeded

Self-Dealing by Corporate Insiders: Legal Constraints and Loopholes

15 billion. Whats more, the rise of this MLP operating/C‐corporation investment company structure has resulted in a novel realignment of incentives and functions. In this innovative arrangement, the pass‐through operating vehicle (i.e., the MLP) avoids double taxation of dividends while effectively committing managers to distribute cash. At the same time, for those MLPs with large maintenance and other requirements for capital, the commitment to pay out cash effectively forces the operating companies to raise capital continuously and stay “close to the capital marketplace.” This unusual combination of operating and investment vehicles also means that C‐Corporation investment companies, unlike their pass‐through counterparts, must manage tax on their own books and disclose to their investors the after‐tax results of their portfolio trading as well as their capital gains “overhang.”