Nathan Mauck

Determinants of Sovereign Wealth Fund Investment in Private Equity

This paper examines investment patterns of 50 sovereign wealth funds (SWFs) in nations around the world. We study investment by SWFs in 903 public and private firms over the period 1984-2009. As expected, we observe SWFs investments are more often in private firms when the market returns of target nations are negatively correlated to the market returns of the SWF nations. But counter to expectations, the data indicate that SWFs are more likely to invest in private firms of target nations with weaker legal conditions, and when the legal differences between the SWF country and the target country are more pronounced. This evidence is consistent with strategic rationales for investment and potential corporate governance conflicts.

Bilateral Political Relations and the Impact of Sovereign Wealth Fund Investment

We examine the role of bilateral political relations in sovereign wealth fund (SWF) investment decisions. Our empirical results suggest that political relations play a role in SWF decision making. Contrary to predictions based on the FDI and political relations literature, we find that relative to nations in which they do not invest, SWFs prefer to invest in nations with which they have weaker political relations. Using a two-stage Cragg model, we find that political relations are an important factor in why SWFs invest but matter less in determining how much to invest. These results suggest that SWFs behave differently than other economic agents. Consistent with the FDI and political relations literature, we find that SWF investment has a positive (negative) impact for relatively closed (open) countries. Our results suggest that SWFs use - at least partially - non-financial motives in investment decisions.

Is Sovereign Wealth Fund Investment Destabilizing

We investigate whether accusations by the popular press regarding the potential destabilizing force of sovereign wealth fund (SWF) investment have merit. SWF investments are associated with a reduction in the compensation of risk over the five-year term examined. Firm volatility decomposition suggests that it is mainly idiosyncratic risk that drives these impacts. Granger causality results suggest that SWFs are poorly informed in their investments (compared to the market) or they have nonfinancial motivations. There is no evidence that the media coverage precedes the poor performance. These findings suggest that SWF investment could be potentially destabilizing.

Diversification Bias and the Law of One Price: An Experiment on Index Mutual Funds

Individual investors select high-fee index mutual funds despite the fact that the future payouts are nearly identical. We offer an explanation for this violation of the Law of One Price based on investor desire to diversify. While diversification in some settings may be beneficial, in the case of assets with identical payouts, fee minimization is the only rational strategy. Our evidence confirms that investors diversify by selecting multiple higher fee funds rather than minimizing fees when investing in index mutual funds.

Comparing U.S. and European market volatility responses to interest rate policy announcements

We examine the response of U.S. (VIX) and German (VDAX) implied volatility indices to the announcement of interest rate policy decisions by the Federal Open Market Committee (FOMC) and the European Central Bank (ECB). We present new findings that indicate that VDAX declines on FOMC meeting days, a result that holds for nearly all announcement types. VDAX declines on ECB meeting days in which there is a negative rate surprise or no surprise and is unrelated to ECB meeting days otherwise. VIX is unrelated to ECB meeting days. We confirm prior findings that VIX declines on FOMC meetings days regardless of the content of the meeting. Taken collectively, our results indicate a prominent position for the FOMC in determining uncertainty levels both domestically and abroad relative to a conditional domestic relation between uncertainty levels and the ECB.

Do senior citizens prefer dividends? Local clienteles vs. firm characteristics

We examine the payout policy of U.S. firms over the period 1980–2008. Prior research indicates that firm characteristics, managerial preferences, and investor clienteles are all important factors in setting payout policy. Counter to the oft-reported positive relation between senior citizens and the use of dividends, we find no such significant relation. Our results indicate that either senior citizens are indifferent between dividends and repurchases, or that if seniors do demand dividends, they have no influence over firm payout policy. The evolution of firm characteristics, including the average firm size, age, and volatility of earnings over time, best explains payout policy.

Ownership Structure, Corporate Governance, and Bilateral Political Relations: Evidence from Chinese Cross-Border Mergers

This paper examines the relation between firm ownership structure, bilateral political relations and firm performance using a sample of 219 cross-border mergers conducted by Chinese listed companies from 2000 to 2013. First, we find that government-affiliated bidder abnormal returns do not differ from non-affiliated bidders in the announcement period after controlling for deal characteristics. However, longer-term post-merger bidder abnormal returns are lower for government-affiliated bidders, consistent with the general inefficiency associated with government-affiliation. Second, our results indicate that improving bilateral political relations between China and target nations are positively associated with both short and long-term bidder performance, indicating a role for political institutions in firm outcomes. Third, we find that the interaction between government-affiliation and change in political relations is generally unrelated to bidder performance. However, in target nations with relatively low political risk, the interaction between government-affiliation and change in political relations is positively related to longer-term bidder performance. Thus, government-affiliation can be value enhancing in certain cases. Finally, our results indicate that government-affiliated bidders do not differ in target selection criteria relative to non-affiliated bidders. Collectively, our results suggest an important role for bidder ownership type as well as national political relations in cross-border M&A.

The Dynamic Relation Between Options Trading, Short Selling, and Aggregate Stock Returns

We examine the information contained in option trading and short selling using a dynamic VAR model. First, we address whether options and shorts are complements or substitutes. Contrary to existing event studies around option listing introductions, we show short selling and options trading are complements rather than substitutes. Second, we examine which group is relatively more informed. The results indicate that options traders are relatively more informed. Finally, we examine if options are redundant. Our results indicate that options markets are non-redundant.

Dividend Initiations, Increases and Idiosyncratic Volatility

We examine three aspects of the relation between dividend initiation and increase announcements and idiosyncratic volatility. First, consistent with dividend signaling, we find that firms with higher levels of idiosyncratic volatility are associated with higher announcement abnormal returns when initiating or increasing dividends. Second, high idiosyncratic volatility firms are associated with stronger positive post event return drift. Finally, firms on average experience an ex post reduction in idiosyncratic volatility following dividend initiations that is associated with announcement and long-term abnormal returns.

Idiosyncratic Volatility and Firm-Specific News: Beyond Limited Arbitrage

Recent evidence (Stambaugh, Yu, and Yuan, 2015) indicates that the most promising explanation for the negative price of idiosyncratic volatility is from its function as a limit arbitrage. Our evidence incorporating firm specific news is inconsistent with the limited arbitrage explanation. Since mispricing is most likely to occur during news announcements, the pricing of news volatility (volatility contemporaneous to news announcements) should be stronger than that of non-news volatility (volatility without an identified news announcement). We find the opposite. Non-news volatility has robust negative price and lacks some of the key features expected from the limited arbitrage explanation. We conclude that the pricing of idiosyncratic volatility is beyond its function as a limit of arbitrage. In addition, we consider evidence at odds with explanations based on difference of investor opinion and investor sentiment. Hence the pricing of idiosyncratic volatility is a deeper puzzle.