Essays on mutual funds and stock lending

Sigurdsson, Kari (2007) Essays on mutual funds and stock lending. Doctoral thesis, University of London: London Business School.

Abstract

This dissertation contains three empirical studies in asset pricing. The first two studies are on mutual funds and the last one on stock lending, a practice that has become an essential part of asset management in the modern world of market neutral funds. Chapter one investigates European mutual funds with asymmetric performance fees (APFs). I show that APF funds are more conservative in terms of risk taking and outperform comparable non-performance fee funds in bear markets while underperforming in bull markets. I also show that APF funds increase total risk if the APF contract is out of the money in the middle of an assessment period. However, this increase in risk-taking does not decrease performance during the latter part of the assessment period. Overall, the results do not indicate that APFs neither induce excessive risk taking nor align the interest of fund managers and investors to a greater extent than non-APF funds. Chapter two is about the relationship between money flows and past performance in US mutual funds. Several studies have documented a convex relationship between past performance and net money flows for individual mutual funds in the US. The main finding in this chapter is that the sensitivity of net flows to past performance has become stronger for funds in all performance quintiles during the nineties compared to the previous two decades. Furthermore, I find support for the idea that increased inflows during the nineties have strengthen the relationship for the better performing funds and decreased transaction costs have made investor more willing to leave the poorly performing funds. In Chapter three I investigate whether price efficiency is affected by short-sale constraints. Using a unique dataset from several custodians with world-wide stock level information on supply of shares available for short-selling and the borrowing fee, I show that short-sales constraints reduce price efficiency.