Youchang Wu

Mutual Fund Flows and Cross-Fund Learning within Families

We develop a model of performance evaluation and fund flows for mutual funds in a family. Family performance has two effects on a member funds estimated skill and inflows: a positive common-skill effect, and a negative correlated-noise effect. The overall spillover can be either positive or negative, depending on the weight of common skill and correlation of noise in returns. Its absolute value increases with family size, and declines over time. The sensitivity of flows to a funds own performance is affected accordingly. Empirical estimates of fund flow sensitivities show patterns consistent with rational cross-fund learning within families.

Managerial Rents vs. Shareholder Value in Delegated Portfolio Management: The Case of Closed-End Funds

We examine the dynamics of assets under management (AUM) and management fees at the portfolio manager level in the closed-end fund industry. We find that managers capitalize on good past performance and favorable investor perceptions about future performance, as reflected in fund premiums, through AUM expansions and fee increases. However, the penalties for poor performance or unfavorable investor perceptions are either insignificant, or substantially mitigated by manager tenure. Long tenure is generally associated with poor performance and high discounts. Our findings suggest substantial managerial power in capturing CEF rents. We also document significant diseconomies of scale at the manager level.

Industry Competition, Winner's Advantage, and Cash Holdings

We examine the strategic role of cash in industries with significant R&D, and the variation of cash holdings and R&D intensity across such industries. Firms compete to innovate but must also finance to bring innovations to the market. The first successful launcher of a new product enjoys an advantage. Outside financing takes time. Cash holdings, R&D intensity, and industry concentration are determined endogenously in equilibrium. Both cash holdings and R&D intensity increase with the winners advantage and time delay in outside financing, and decrease with entry costs. Empirical patterns of industry cash holdings and R&D intensity support the model predictions.

First Mover Advantage, Time to Finance, and Cash Holdings

We examine the strategic role of cash in a two-stage competition model featuring a first-mover advantage in product markets and time delays in outside financing. Due to the joint effect of the first-mover advantage, time to finance, market profitability, participation cost, and the arrival rate of investment opportunities, large cash holdings can arise in equilibrium in both concentrated and diffuse industries, leading to a rich relation between industry concentration and cash holdings. The model also reveals novel interactions of these drivers of cash holdings that are consistent with empirical evidence. Furthermore, despite that cash is held to enable fast responses to investment opportunities, the correlation between cash holdings and realized investment is low. Our model provides an explanation for the large variation in cash holdings across industries and over time, and the strong correlation between cash holdings and R&D.

Mutual Funds Apart from the Crowd

We construct measures of mutual fund uniqueness using cluster analysis of fund returns. We find funds that are more unique have higher total expense ratios, mainly due to their higher management fees. As the fund uniqueness increases, the gap in net performance widens between funds with above-median past performance and those with below- or at-median past performance. Fund uniqueness significantly reduces the sensitivity of fund flows to past performance, and increases performance persistence, especially when funds perform poorly. Since unique funds are more difficult to evaluate, these results support the prediction that higher search costs in the asset management markets lead to higher fees and larger outperformance by informed managers. They also suggest that higher costs of performance evaluation and the lack of close substitutes reduce the sensitivity of fund flows to performance and increase the convexity in the flow-performance relation, which may in turn increase performance persistence, especially the persistence of poor performance.