D. Bruce Johnsen

Socially Responsible Investing: A Critical Appraisal

This paper makes three important points regarding socially responsible investing. First, the current methodology involving SRI fund divestiture of the securities of firms that engage in socially irresponsible activity often results in unacceptable unintended consequences. Second, in many cases the proper methodolgy for SRI funds may be purposely to include the securities of such firms in the portfolio in an effort to internalize socially irresponsible interfirm spillovers. Finally, that SRI fund managers may be able to bond their performance by organizing as closed-end funds subject to takeover and liquidation if the stated socially responsible objectives are not met.

Prevention is Better than Cure: The Role of IPO Syndicates in Precluding Information Acquisition

We treat information acquisition by potential investors in initial public offerings as endogenous. With endogenous information, the critical question is why underwriters would allow investors to spend resources acquiring superior information intended solely to effect a wealth transfer. We show that an investment banking syndicate is an institutional arrangement designed to avoid such a transfer. By inviting rival banks to share in the offering, a managing underwriter ensures they have a strong incentive to remain ignorant. We characterize the resulting outcome as one of symmetric ignorance. The desire to maintain symmetric ignorance is consistent with the observed passivity of nonmanaging syndicate participants.

Myths About Mutual Fund Fees: Economic Insights on Jones v. Harris

Mutual funds stand ready at all times to sell and redeem common stock to the investing public for the net value of their assets under management. In the language of transaction cost economics, they are open-access common pools subject to virtually free investor entry and exit. The Investment Company Act (1940) requires mutual funds to be managed by an outside advisory firm pursuant to a written contract, which normally pays the adviser a small share of net asset value, say, one-half of one percent per year. Following 1970 amendments to the Investment Company Act imposing a fiduciary duty on advisers with respect to their receipt of compensation, a large number of private civil suits attempting to recover excessive fees have been filed against advisory firms. By failing to account for the transaction costs inherent in mutual fund organization, Congress, securities regulators, financial scholars, and even courts have misidentified a conflict of interest with respect to fund advisory fees, encouraging these frivolous suits. With free investor entry and exit and rational expectations, fund flows endogenize investor returns. Regardless of the level of the advisory fee, any expected abnormal return to a manager’s superior stock-picking skill will be competed away by investors chasing the prospect of capturing the associated rents. With shareholders having a common claim to fund assets, all expected rents will be either transferred to the manager in the form of higher total fee payments on a larger asset base or dissipated by added administrative costs. As a first approximation, the level of advisory fees is therefore irrelevant to fund shareholders. The best they can expect from placing their money in a managed fund is a normal competitive return after adjusting for risk and other factors. With the U.S. Supreme Court having recently granted certiorari in an excessive fee case appealing an arguably maverick opinion by Judge Frank Easterbrook of the Court of Appeals for the Seventh Circuit, it is essential that various myths about mutual fund fees be exposed to careful economic analysis.

Property Rights, Salmon Husbandry, and Institutional Change Among Northwest Coast Tribes

This research investigates the hypothesis that prior to British sovereignty the native tribes of the Northwest Coast of North America established sophisticated property rights institutions to encourage efficient husbandry of the regions salmon fisheries. The hypothesis asserts that to the extent tribal property rights to salmon streams were clearly defined and enforced tribal leaders had the incentive to maximize the present value of expected returns to the streams under their exclusive control. As rational maximizers they would very likely have invested resources to accumulate private stream-specific knowledge of salmon husbandry. Husbandry could have included selection in favor of preferred biological characteristics such as larger average fish size, larger population size, reduced run variability, advantageous run timing, and home stream loyalty. In many cases, the resulting biological adaptations might have evolved unconsciously, but in other cases they would have had to be the result of counter-intuitive, and therefore purposeful, genetic selection by tribal leaders. The available evidence is broadly consistent with the salmon husbandry hypothesis. This research has important implications for the resolution of native land claims, the formulation of rational environmental policy, and understanding the evolution of customary law. It also sheds light on the conditions under which an early breakthrough in scientific knowledge might lead to dramatic and predictable institutional change.