Zoran Ivkovich

Cross-Subsidization in Institutional Asset Management Firms

We identify strong and robust evidence of strategic performance allocation in the institutional money management industry, directed toward strong recent performers. The extent of strategic performance allocation varies with the product’s client power. Strategic performance allocation is particularly pronounced for young products. Studying variation in opportunities for strategic performance allocation (illiquidity of the products’ investment styles and cross-trading status of the firm) enables us to show that (at least part of) strategic performance allocation rests upon cross-subsidization. We also quantify, and assess the implications of, strategic performance allocation away from the products that likely cross-subsidize this performance. * We thank Vikas Agarwal, Stephen Dimmock, Mark Grinblatt, Umit Gurun, Jung Hoon Lee, Joshua Pollet, Jeffrey Pontiff, Veronika Pool, Mark Seasholes, Merih Sevilir, Clemens Sialm, Andrei Simonov, and Scott Yonker for comments and suggestions. Our gratitude goes to the 2012 Finance from Down Under conference participants, especially Neal Galpin (the discussant). We also thank seminar participants at Hong Kong University, Indiana University, Massey University Albany Campus, Massey University Palmerston North Campus, Nanyang Technological University, National University of Singapore, and Victoria University for their suggestions.We identify strong and robust evidence of strategic performance allocation in the institutional money management industry, directed toward strong recent performers. The extent of strategic performance allocation varies with the product’s client power. Strategic performance allocation is particularly pronounced for young products. Studying variation in opportunities for strategic performance allocation (illiquidity of the products’ investment styles and cross-trading status of the firm) enables us to show that (at least part of) strategic performance allocation rests upon cross-subsidization. We also quantify, and assess the implications of, strategic performance allocation away from the products that likely cross-subsidize this performance.

A Tangled Tale of Training and Talent: PhDs in Institutional Asset Management

Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s’ publications in leading economics and finance journals further enhance the performance gap.Several hundred individuals who hold a Ph.D. in finance, economics, or a variety of others fields work for institutional money management companies. The gross performance of investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for matched non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s’ publications in leading finance and economics journals accentuate many of these differences. In the context of money management, we evaluate whether a Ph.D. is a positive signal of managerial skill. The capability to identify money managers who will be successful is important in both academic and practical settings. We start from the premise that substantial effort and knowledge acquisition is necessary to complete the advanced coursework and unique research required to obtain a Ph.D. Thus, individuals holding these degrees will have unusual characteristics relative to the baseline population. We extend this logic to the production of papers published in leading economics and finance journals. Therefore, substantial academic publications in this arena could play an additional role beyond the simple possession of a Ph.D. degree. Of course, for individuals holding a Ph.D. to make a substantial difference in product performance, they must be placed in key roles within the management company. It is possible that a Ph.D. program serves as a screening device for individuals with innate intelligence following Spence (1973). Alternatively, specialized human capital developed during a Ph.D. program might be particularly useful for various tasks related to money management as in Becker (1964, 1993). Nevertheless, it is also possible that these degrees are largely useless outside an academic environment. In spite of the latter possibility, hundreds of individuals holding this advanced degree are employed by institutional money management companies in our sample. Is this employment pattern driven by a random distribution of advanced degrees amongst money managers, or does it have an explanation rooted in some form of selection? The possibility that education is linked to managerial talent in the context of money management has been explored by the existing literature. For instance,

Trading Frequency and Information Efficiency: Theory and Evidence from US and Chinese Markets

This paper analyzes the relation between price informativeness and trading frequency. We develop a sequential trading model to capture the tradeoff between trading more frequently and acquiring more information. The key component of the model is the cost of information collection and processing. When information flow comes sequentially, traders must give up some early trading opportunities if they want to acquire more information. We show that more trading opportunities may induce informed traders to participate in more trades before obtaining more accurate information. Consequently, when informed traders trade more frequently, less information is impounded into prices. Empirical tests using stocks listed on NYSE, as well as the Shanghai Stock Exchange and the Shenzhen Stock Exchange, support the two testable implications of our model — a negative relation between the quality of the information environment and informed traders’ trading frequency, and a negative relation between informed traders’ trading frequency and price informativeness. One implication of our model and empirical results is that a decrease in excessive trading activities may help shift market participants’ attention from short-term price movements to companies’ fundamental information so that the information could be more efficiently impounded into prices, which, in turn, may further lead toward better resource allocation in financial markets.