James Wuh Lin

Agency Costs and Ownership Structure

We provide measures of absolute and relative equity agency costs for corporations under different ownership and management structures. Our base case is Jensen and Mecklings (1976) zero agency-cost firm, where the manager is the firms sole shareholder. We utilize a sample of 1,708 small corporations from the FRB/NSSBF database and find that agency costs (i) are significantly higher when an outsider rather than an insider manages the firm; (ii) are inversely related to the managers ownership share; (iii) increase with the number of nonmanager shareholders, and (iv) to a lesser extent, are lower with greater monitoring by banks.

A Fundamental Approach to Estimating Economies of Scale and Scope of Financial Products: The Case of Mutual Funds

We propose a ‘Fundamental’ approach to estimate the economies of scale and scope for financial institutions offering multi-product lines. We first estimate pure economies of scale from its fundamental definition, which is the marginal cost reduction that is to be achieved by single product firms of increasing size that offer the same product. Similarly, we estimate the economies of scope from its fundamental definition, as the marginal cost reduction achieved by the addition of a new product line. Operationally, we compare the cost of operating a say, 3 product-line financial institution with the cost of operating a portfolios of companies that are synthetically created from a control sample of financial institutions offering fewer, such as 2 and 1 similar product lines. When this approach is applied to mutual funds data, we find economies of scale for some fund type. The evidence on marginal cost economies due to increasing scope is rather weak. The results have practical implications for potential organizers and current management of investment companies.

Mutual Fund Managers' Efforts and Performance

hen mutual fund managers experience subpar performance relative to their peer W group, their funds may experience &fficulty in attracting new money or in retaining their investors. The shake-up of the nation’s largest mutual fund, Fidelity Investments, two years ago reflects the fund’s effort to boost its returns. Mutual fund earnings are a function of both a fund’s performance and the amount of funds under management; the latter is in turn a hnction of performance. It would be expected that poor-performing fund managers are under pressure to take some actions; as a result, they should be trying harder. Mutual find managers may choose to exert greater effort in several ways. They may spend more money and time in information acquisition in order to better select stocks or time the market. They could play it safe and cut expenses. Or, they could do the opposite trade more often in order to capture large short-term gains. Finally, they may decide that increasing marketing effort (promotion, advertising, or incentives to salespeople) could more than offset the withdrawals of finds by the performance sensitive investors. The purpose of this article is to study the behavior of mutual fund managers accordmg to their previous performance. Three related issues are investigated:

The relation between gold and stocks: an analysis of severe bear markets

No prior research has (1) studied the relation between gold and stocks for the four severe bear markets since 1960s, (2) used different segments of stock markets simultaneously for analysis and (3) implemented a system of equations to control for exogenous and endogenous variables to investigate the role of gold for investments hedge in these severe bear market periods, and compare the results with its role in nonbear market periods. Results show that gold was a good instrument for hedging stock market risk for only two of the four severe bear market periods analysed. For nonbear market periods, except for small-cap stocks, gold also did not offer good risk hedging. The findings are of interest, as it coincides with the fact that small-cap stocks are the riskiest and most volatile investment even during economic good times, and gold is found to offer a risk-hedging power for this segment of the stock market.

The wealth effects of international acquisitions and the impact of the EEC integration

The magnitude and division of gains from U.S. domestic acquisition activity has been extensively studied (e.g., Bradley, Desai, & Kim, 1988). The typical conclusion is that targets clearly gain from takeovers and that bidders at least do not lose (e.g., Jensen & Ruback, 1983), although the evidence about bidders is somewhat mixed. Evidence on domestic acquisitions in other countries generally supports these conclusions. For example, Franks and Harris (1989) study U.K. acquisitions and find that targets experience gains of 20 to 25 percent while bidders gain “zero or modest.” However, there is relatively little evidence about the wealth effects of international acquisitions on U.S. bidding firms. A recent study by Doukas and Travlos (1988) found that, as a whole, there are not significant wealth effects on U.S. acquiring firms over the period 1975 through 1983. However, they find positive abnormal returns for firms that make acquisitions in countries in which the firms had not previously been operating. The broad purpose of this paper is to provide additional evidence about the wealth effects of international acquisitions. Three specific lines of inquiry are pursued. First, we provide more recent evidence (up to 1989 from 1980) than is found in the extant literature. Second, we examine the gains from acquisitions in specific countries. Third, we explore the wealth effects of acquisitions of European firms that were impacted by the EEC integration. The paper is organized as follows. The next section discusses the data and methodology. Sections 3 and 4 report the findings. The paper ends with a brief summary.

Information Sharing, Return Characteristics, and Portfolio Beta: The Case of Mutual Funds

The spanning of financial products by the same mutual fund group is evidenced by the dramatic increase in the of mutual funds offered by the a mutual fund group in recent years. This study examines this issue, in the form of information sharing, along with other related issues such as factors in mutual funds that may affect the recent returns; the impact of transaction costs on the investment choice under different investment horizons; the effect of fund size on returns. The results show that information sharing, economies of scale, and higher management efficiency do not explain the better apparent performance of the mutual funds with the most separate funds. A significant positive relationship is found between management fees and long-term returns, suggesting a premium for superior long-term fund management skills. Mutual fund returns are found to exhibit a firm-size effect even after controlling for beta risk. In the long run, mutual fund excess returns behave in accordance with the predictions of the CAPM.

Ascertaining the effects of employee bonus plans

The effect of employee bonus plans may be difficult to ascertain empirically if the size of bonus is not large enough in magnitude compared to base salary. This study makes use of data from Taiwan where employee bonus payments are not only mandated by law but are quite often several times a typical employees annual base salary. The use of this unique data allows one to empirically observe interesting relationships difficult to ascertain from traditional datasets. Evidence is found that the performance of bonus-paying firms is related to the size of bonuses paid, both before and after analysis, and across industries. In general, evidence seems to indicate that bonus-paying firms tend to achieve higher productivity, better cost control and asset utilization, and share price returns. However, there may be evidence that marginal returns to employee bonuses are decreasing, reflecting the use of bonuses as substitutes for cash pay in order to attract employees in short supply. These results can serve as useful benchmarks for future studies.

Arbitrage risk and market efficiency

This article explores arbitràge risk and models a testable hypothesis for studies in the treasury bill futures market efficiency. The modern mean-variance theory applied to a hedged arbitrage portfolio is used for the analysis. For a given expected arbitrage profit, we derive minimum variance arbitrage (MVA) conditions. A minimum variance arbitrage line (MVAL) is then derived to show the risk-return tradeoff for arbitrage. Market efficiency conditions are discussed by taking into account arbitrage risk along with bid-ask spreads. The analysis in this study helps explain the puzzle of inefficiencies in the T-bill futures market. Because refinancing and variation margin (due to marking-to-market) are required for arbitrage using futures trading in general, our ex ante arbitrage model using the case of T-bill futures can be applied to other futures markets.