Sunil Wahal

Pension Fund Activism and Firm Performance

This paper studies the efficacy of pension fund activism by examining all firms targeted by nine major funds from 1987 to 1993. I document a movement away from takeover-related proxy proposal targetings in the late 1980s to governance-related proxy proposal and nonproxy proposal targetings in the 1990s. For the vast majority of firms, there are no significant abnormal returns at the time of targeting. The subset of firms subject to nonproxy proposal targeting, however, experiences a significant positive wealth effect. There is no evidence of significant long-term improvement in either stock price or accounting measures of performance in the post-targeting period. Collectively, these results cast doubt on the effectiveness of pension fund activism as a substitute for an active market for corporate control.

Momentum Trading by Institutions

We document the equity trading practices of approximately 1,200 institutions from the third quarter of 1987 through the third quarter of 1995. We decompose trading by institutions into the initiation of new positions (entry), the termination of previous positions (exit), and adjustments to ongoing holdings. Institutions act as momentum traders when they enter stocks but as contrarian traders when they exit or make adjustments to ongoing holdings. We find significant differences in trading practices among different types of institutions.

Institutional trading and alternative trading systems

Abstract We analyze the use of alternative trading systems in a large sample of institutional orders and the trades that constitute these orders. Proprietary data allow us to distinguish between orders and trades filled by day and after-hours crossing systems, electronic communication networks (ECNs), and traditional brokers. Controlling for variation in order and security characteristics, as well as endogeneity in the choice of trading venue, we find that realized execution costs are generally lower on alternative trading systems. Order handling rules and tick size changes implemented in 1997 appear to have reduced the cost advantage of trading on ECNs.

Spin-Offs, Ex Ante

Cusatis, Miles, and Woolridge (1993) report large positive excess returns following spin-offs over the period 1965-88. We investigate whether a trading strategy based on this ex post analysis would have earned excess returns on an ex ante basis over the period 1989-95. When compared with the matched firm benchmark used by Cusatis et al. and the Fama and French (1993) 3-factor model, the strategy does not beat the benchmark. When compared with size- and book-to-market-matched portfolios, the strategy typically beats the benchmark. On an ex ante basis, post-spin-off returns provide a shaky basis for rejecting the efficient market hypothesis. Copyright 2001 by University of Chicago Press.

Agency Conflicts in Closed-End Funds: The Case of Rights Offerings

We study 120 rights offerings by closed-end funds over 1988-1998. On average, rights offerings are announced when funds trade at a premium. This premium turns into a discount over the course of the offering. The premium decline is more severe when the increases in investment advisor’s compensation are larger and when the fund uses affiliated broker-dealers to solicit subscriptions to the offer. A clinical analysis shows that rights offerings allow investment advisors to sidestep fee rebates and increase pecuniary benefits to affiliated entities. Overall, our results suggest the presence of significant conflicts of interests in rights offerings by closed-end funds.

Who Opts Out of State Antitakeover Protection?: The Case of Pennsylvania's SB 1310

In 1990, Pennsylvania enacted Senate Bill 1310, containing five provisions designed to make takeovers prohibitively expensive but allowing firms to opt out of some or all of the laws provisions. We find that firms that opted out of SB 1310 had lower insider control of voting rights and were less likely to have a poison pill in place prior to the laws enactment, even after controlling for firm size and the monitoring activities of blockholders and outside directors. In addition, we find that opt-out firms spent less on R&D than non-opt-out firms. Our result suggest that some boards value takeover defense (whether firm or state-level) whereas others prefer to be subject to an active market for corporate control.

Electronic Markets and Trading Algorithms

Academics attempt to understand the consequences of fragmentation, electronic markets, and trading algorithms. Practitioners, by necessity, devise ever-improving trading algorithms to achieve their trading objectives. This article is a bridge of sorts. The author uses the structural approach developed throughout decades of research on price formation to illuminate modern electronic-trading practices and algorithms. He argues that despite the constantly changing trading landscape driven by tech nology improvements, the economic trade-offs embedded in trading algorithms are, for all intents and purposes, not different from manual trading. All that has changed is the implementation.

The Term Structure of Liquidity Provision

We examine realized spreads and price impact in clock and trade time following each trade in all common stocks from 2010-2017. The term structure of realized spreads (price impact) is sharply downward (upward) sloping, implying that (a) market maker profitability is sensitive to speed, and (b) the choice of the horizon of measurement is critical when drawing inferences from spread decompositions. The majority of the price impact of trades in large (small)-capitalization stocks takes place within 15 (60) seconds. Net profits to liquidity provision, or equivalently, net costs to liquidity demanders, decline over the sample period even at the shortest horizons that we consider: at the 100-millisecond horizon, aggregate profits decline from 1.9 basis points of total dollar volume in 2010 to 1.0 basis points in 2017.

The Profitability and Investment Premium: Pre-1963 Evidence

I investigate the profitability and investment premium in stock returns using hand-collected data from Moody’s Manuals for 1940-1963. Three results emerge. First, the profitability premium in 1940-1963 is similar in magnitude to the post-1963 period. Second, I detect no reliable relation between investment and returns, regardless of whether investment is measured using growth in total assets or book equity. The lack of an investment premium extends back to 1926. Third, unlike in 1963-2013, HML is not redundant in the Fama and French (2015) five-factor model.

The Demand for Diversification in Incomplete Markets

In Merton (1987), idiosyncratic risk is priced in equilibrium as a consequence of incomplete diversification. We modify his model to allow the degree of diversification to vary with average idiosyncratic volatility. This simple recognition results in a state-dependent idiosyncratic risk premium that is higher when average idiosyncratic volatility is low, and vice versa. The data appear to be consistent with a positive state-dependent premium for idiosyncratic risk both in the US and in other developed markets.