Matthew R. Morey

Does Better Corporate Governance Result in Higher Valuations in Emerging Markets? Another Examination Using a New Data Set

This paper utilizes a new data set from AllianceBernstein that, unlike other corporate governance data, has monthly-updated firm-level governance ratings for 21 emerging markets countries for almost a five year period. With these unique data, we examine how changes in corporate governance ratings impact firm valuation. Using this test we find evidence that improvements in corporate governance result in significantly higher valuations.

To hedge or not to hedge: the performance of simple strategies for hedging foreign exchange risk

Abstract This paper investigates the efficacy of simple strategies for hedging foreign exchange risk. The strategies are: to always hedge, to never hedge, to hedge when the forward rate is at a premium, to hedge only when the premium is large, and a strategy based upon relative purchasing power parity. We find a strategy which hedges based upon large premia generally outperforms the other strategies for the period 1989–1998. Moreover, we document that in every sample and time horizon period, an unhedged strategy performs better than a hedged strategy. We illustrate our results using a data set of five countries.

Does a Better Education Make for Better Managers? An Empirical Examination of CEO Educational Quality and Firm Performance

This paper represents the first attempt, to our knowledge, to empirically examine the relationship between the quality of Chief Executive Officer (CEO) education and firm performance. This is an important question as many papers in the management literature have postulated that managers with higher educational attainment will be more adaptive and innovative, and more likely to possess other characteristics that may improve firm performance. We find four results in our analysis. First, using the mean entrance scores as proxies for the prestige of undergraduate and graduate programs, we find no evidence that firms with CEOs from more prestigious schools perform better than firms with CEOs from less prestigious schools. Second, we find that firms managed by CEOs with MBA or law degrees perform no better than firms with CEOs without graduate degrees. Third, we find some limited evidence that firms led by CEOs with non-MBA, non-law graduate degrees have slightly better risk-adjusted market performance than other firms. Fourth, we find that compensation is somewhat higher for CEOs who attended more prestigious schools.

Should you carry the load? A comprehensive analysis of load and no-load mutual fund out-of-sample performance

Abstract This paper compares the out-of-sample performance of no-load and load mutual funds. Unlike previous studies, this paper provides a more comprehensive analysis as it uses methodologies to incorporate loads directly into the returns. We find two important results. First, after adjusting for loads in the returns data, no-load funds are found to perform much better than load funds, with the differences found to be significant at the 1% level across many different performance metrics. Second, we find that within load funds themselves there is little significant difference in out-of-sample performance between high-load funds and low-load funds even after adjusting for loads.

Predicting Emerging Market Mutual Fund Performance

This article examines the ability of well known mutual fund characteristics, including the expense ratio, turnover, fund size, recent past performance, manager tenure, and Morningstar mutual fund star ratings, to predict emerging market mutual fund performance. We form three separate samples of emerging market mutual funds, adjust the returns for loads, and employ three methods to adjust for survivorship bias. We find that the expense ratio is the only fund characteristic that consistently predicts future fund performance. Specifically, emerging market funds with lower expense ratios predict better future fund performance. We also find some limited evidence that passive management outperforms active management in emerging market funds.

Predicting Foreign Exchange Directional Moves: Can Simple Fundamentals Help?

Researchers have documented that economic fundamentals provide poor predictions of future exchange rates. The authors ask instead how well basic models of foreign exchange determination predict the direction of future exchange rate changes. The forward rate is consistently a poor predictor of the direction of the future spot exchange rate across different currencies, time periods, and term lengths. The authors also find, however, that after 1984, a purchasing power parity equilibrium exchange rate predicts the future direction of the spot rate quite well. This is especially the case when the equilibrium exchange rate implied by purchasing power parity diverges strongly from the spot rate. These results indicate that investors should pay attention to purchasing power parity exchange rates as indicative of future directional changes in exchange rates.

Estimation Risk in Morningstar Fund Ratings

The well-known Morningstar mutual fund star rating system rates funds regardless of age differences. This means the estimates that younger fund ratings are based on have significantly higher estimation risk than the estimates that the ratings of older funds are based on. Investors should be somewhat less confident that the ratings of younger funds are truly what they are estimated to be. The point should be clear in an investigation of 1,281 international equity mutual funds.

Mutual Fund Corporate Culture and Performance

There are several reasons why mutual fund corporate culture should predict fund performance. First, at funds with excellent corporate cultures, employees are recognized for their contributions and are involved in decision making. This usually translates into employees working harder, being more productive, and more committed to the firm. All things being equal, this should enhance fund performance as funds with excellent corporate cultures will not have to engage as regularly in the expensive process of hiring and training new employees as other funds. Second, a fund with a strong corporate culture will be investor driven rather than sales driven. Consequently, it will pursue policies that always have the investor in mind, e.g., closing funds that are too large, not using trendy funds just to attract greater assets, keeping fees fair, not using soft dollars, and implementing redemption fees to stop market timing. Such policies should improve fund performance for the investor as compared to funds that do not practice these policies. Third, a fund with an excellent corporate culture will communicate well to its investors. Such a fund will put out shareholder letters that explain in-depth what they are buying, not buying, and what went right as well as what went wrong. This effective communication should help investors place the current investing environment into perspective and thus can help them think longer term and avoid making fleeting decisions. As a result such a fund will have better performance as they will have long-term investors that are less likely to engage in market timing strategies. In this paper we test if the above ideas hold as we examine if a mutual fund’s own corporate culture predicts fund performance. To do this we use Morningstar’s corporate culture grades for mutual funds and then examine the ability of these corporate culture grades to predict risk-adjusted performance of domestic equity funds over the period 2005-2010. Using methods that are robust to survivorship bias, we find there is little significant evidence that corporate culture predicts better fund performance. In the end having a fund with a strong corporate culture may insulate a mutual fund from scandal but will not result in the mutual fund outperforming the market.

Stock Market Opening and Efficiency in Emerging Market Stock Prices: An Empirical Examination Using Endogenous Structural Break Techniques

In this paper we investigate three empirical aspects of emerging stock markets. First, we use the endogenous structural break techniques of Bai (1996) and Bai and Perron (1998) to identify stock market opening dates in 16 different emerging market countries. The results indicate that there is some weak evidence that endogenous break opening dates precede the official opening dates as described by other authors. This suggests that information prior to the official opening date influenced market activity. Second, using the endogenous break dates as the true opening dates, we examine whether the opening of the market improves stock market efficiency. Using two different forms of data and several econometric tests, we find that opening has generally not increased stock market efficiency. Indeed, it appears that the markets were as efficient before the openings as they were after. Third, we apply the endogenous break techniques to emerging market composite portfolios. We find that the overall composite portfolio shows little evidence of a structural break. However, the regional indexes do indicate breaks around important periods of financial change. The Latin American composite index displays a break exactly during the period when the Brady Debt reduction initiative was announced. The Asian composite index shows several breaks including the period close to the 1997 East Asian Financial Crisis.

Redemption Fees and the Risk-Adjusted Performance of International Equity Mutual Funds

In the wake of the market timing and late trading mutual fund scandals, many mutual funds adopted redemption fees to limit market timing. In this paper we investigate the impact of redemption fees on the risk-adjusted performance of U.S. based international equity funds, the very funds that many market timers used. We find three interesting results. First, using event study methodology we find that after the introduction of redemption fee there is a significant increase in the risk-adjusted fund performance. Second, we find that funds that introduced larger-size redemption fees have significantly better performance after the introduction of the redemption fee than other funds. Third, we find that the main reason for the improvement in fund performance after the introduction of the redemption fee is due to lower amounts of cash being held by the fund after the redemption fee. In sum our results suggest that implementation of redemption fees are performance enhancing for international equity funds. As such, long-term investors of international equity funds should actively look for international equity funds that have redemption fees.