Our article comprehensively reexamines the performance of variables that have been suggested by the academic literature to be good predictors of the equity premium. We find that by and large, these models have predicted poorly both in-sample (IS) and out-of-sample (OOS) for 30 years now; these models seem unstable, as diagnosed by their out-of-sample predictions and other statistics; and these models would not have helped an investor with access only to available information to profitably time the market.

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A Comprehensive Look at the Empirical Performance of Equity Premium Prediction

In this paper, we investigate how corporate governance impacts firm value by examining both the value and the use of cash holdings in poorly and well governed firms. Cash represents a large and growing fraction of corporate assets and generally is at the discretion of management. We use several measures of corporate governance and show that governance has a substantial impact on firm value through its impact on cash: $1.00 of cash in a poorly governed firm is valued by the market at only $0.42 to $0.88, depending on the measure of governance. Good governance approximately doubles this value of cash. Furthermore, governance has a significant impact on how firms use cash. We show that firms with poor corporate governance dissipate cash quickly and in ways that significantly reduce operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well governed. All of our results hold after controlling for the level of acquisitions undertaken by cash rich firms, indicating that acquisitions are not solely responsible for the value destruction in poorly governed, cash rich firms. The findings presented in this paper provide direct evidence of how governance can improve or destroy firm value and insight into the importance of governance in determining corporate cash policy.

Corporate Governance and the Value of Cash Holdings

The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark-adjusted expected returns sufficient to cover their costs. If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true α) in the extreme tails of the cross-section of mutual fund α estimates. THERE IS A CONSTRAINT on the returns to active investing that we call equilibrium accounting. In short (details later), suppose that when returns are measured before costs (fees and other expenses), passive investors get passive returns, that is, they have zero α (abnormal expected return) relative to passive benchmarks. This means active investment must also be a zero sum game— aggregate α is zero before costs. Thus, if some active investors have positive α before costs, it is dollar for dollar at the expense of other active investors. After costs, that is, in terms of net returns to investors, active investment must be a negative sum game. (Sharpe (1991) calls this the arithmetic of active management.) We examine mutual fund performance from the perspective of equilibrium accounting. For example, at the aggregate level, if the value-weight (VW) portfolio of active funds has a positive α before costs, we can infer that the VW portfolio of active investments outside mutual funds has a negative α .I n other words, active mutual funds win at the expense of active investments outside mutual funds. We find that, in fact, the VW portfolio of active funds that invest primarily in U.S. equities is close to the market portfolio, and estimated before expenses, its α relative to common benchmarks is close to zero. Since the VW portfolio of active funds produces α close to zero in gross (pre-expense) returns, α estimated on the net (post-expense) returns realized by investors is negative by about the amount of fund expenses. The aggregate results imply that if there are active mutual funds with positive true α, they are balanced by active funds with negative α. We test for the

/pdf/luck-versus-skill-in-the-cross-section-of-mutual-fund-2iisilzm9s.pdf

Luck versus Skill in the Cross-Section of Mutual Fund Returns

Does limited attention among investors affect stock returns? We compare the response to earnings announcements on Friday, when investor inattention is more likely, to the response on other weekdays. If inattention influences stock prices, we should observe less immediate response and more drift for Friday announcements. Indeed, Friday announcements have a 15% lower immediate response and a 70% higher delayed response. A portfolio investing in differential Friday drift earns substantial abnormal returns. In addition, trading volume is 8% lower around Friday announcements. These findings support explanations of post-earnings announcement drift based on underreaction to information caused by limited attention.

/pdf/investor-inattention-and-friday-earnings-announcements-4rb2mu7bao.pdf

Investor Inattention and Friday Earnings Announcements

Corporate governance and the value of cash holdings.

We investigate how the market for corporate control (external governance) and shareholder activism (internal governance) interact. A portfolio that buys firms with the highest level of takeover vulnerability and shorts firms with the lowest level of takeover vulnerability generates an annualized abnormal return of 10 - 15% only when public pension fund (blockholder) ownership is high as well. A similar portfolio created to capture the importance of internal governance generates annualized abnormal returns of 8%, though only in the presence of high vulnerability to takeovers. Further, we show that the complementary relation exists for firms with lower industry-adjusted leverage and is stronger for smaller firms. The complementary relation is confirmed using accounting measures of profitability. Using data on acquisitions, firm level Q's and accounting performance, we explore possible interpretations, providing preliminary evidence for a risk effect as well.

Governance Mechanisms and Equity Prices

We investigate how the market for corporate control (external governance) and shareholder activism (internal governance) interact. A portfolio that buys firms with the highest level of takeover vulnerability and shorts firms with the lowest level of takeover vulnerability generates an annualized abnormal return of 10% to 15% only when public pension fund (blockholder) ownership is high as well. A similar portfolio created to capture the importance of internal governance generates annualized abnormal returns of 8%, though only in the presence of “high” vulnerability to takeovers. The complementarity effect exists for firms with lower industry-adjusted leverage and is stronger for smaller firms.

https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1540-6261.2005.00819.x

the share of portfolio holdings that differ from the benchmark index holdings. We compute Active Share for domestic equity mutual funds from 1980 to 2003. We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time. Active Share predicts fund performance: funds with the highest Active Share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence. Nonindex funds with the lowest Active Share underperform their benchmarks. (JEL G10, G14, G20, G23)

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How Active Is Your Fund Manager? A New Measure That Predicts Performance

The CEO pay slice

We introduce a new measure of active portfolio management, Active Share, which represents the share of portfolio holdings that differ from the benchmark index holdings We compute Active Share for domestic equity mutual funds from 1980 to 2003 We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time Active Share predicts fund performance: funds with the highest Active Share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence Non-index funds with the lowest Active Share underperform their benchmarks

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1400292_code101046.pdf?abstractid=891719&rulid=60563&mirid=2

Martijn Cremers

Papers

Governance Mechanisms and Equity Prices

Governance Mechanisms and Equity Prices

How Active Is Your Fund Manager? A New Measure That Predicts Performance

The CEO pay slice

How Active is Your Fund Manager? A New Measure That Predicts Performance