Working Paper

This paper examines investors’ retirement savings allocation using a hand-collected dataset on 401(k) plans. We find that 83% of investors in our sample hold only 39% of total assets and follow a return-chasing strategy. In contrast, the remaining 17% of wealthy investors with relatively higher financial literacy follow CAPM alpha. This difference between the two investor groups explains why fund flows respond to returns at the plan level but to CAPM alpha at the aggregated fund level. Return-chasing by unwealthy investors is not optimal, as it significantly underperforms a strategy that passively invests in the existing funds in their plans.

This paper investigates portfolio pumping at the fund family level, where non-star fund managers strategically purchase stocks held by star funds in the family to inflate their quarter-end performance. Star funds that engage in such activities show inflated performance after 2002 when the Securities and Exchange Commission increased regulation on portfolio pumping. Stocks pumped by the strategy show strong reversals at the quarter end. Moreover, despite a minor underperformance stemming from portfolio misallocation, non-star fund managers pumping for star funds receive abnormally high subsequent flows, suggesting a pattern of family subsidization.

Using new SEC data, we study fund derivative use and its impact on performance. Despite small portfolio weights, derivatives contribute largely to fund returns. Contrary to prior research, we find most employ derivatives to amplify, not hedge, equity returns. Using machine learning to classify funds’ derivative strategies reveals high specializations linked to information-related trading, liquidity management, gaining exposure, or hedging motives. Long index derivative users drive the amplification. During the COVID-19 crisis, they significantly increased derivative use more than others and shifted strategies, but initially lost on existing positions and then on newly opened short positions when markets unexpectedly rebounded.

Although flows into ESG funds have risen dramatically, it remains unclear whether these funds are truly committed to sustainable investments and how much their investments matter. We shed light on this debate by examining the incentives of fund managers. We find that conditional on similarly large ESG investments, ESG funds vary in their incentives to engage with portfolio firms. ESG funds with higher incentives to engage – committed ESG funds – hold their ESG investments longer, pay more attention to firms’ ESG risk exposure and implement less negative screening. Strikingly, only investments by committed ESG funds contribute to real ESG-improvements, and these funds have outperformed other ESG funds on their ESG holdings. Our paper highlights the importance of incentives when assessing the real impacts of sustainable investments and calls for greater investor awareness of a hidden form of greenwashing.

This paper empirically shows that information acquisition affects stock returns by reducing firm-level information asymmetry. When firms disclose material information known by insiders, information acquisition reduces asymmetric information and lowers stock returns. The effect is stronger for both unexpectedly good and bad news relative to anticipated news and when investors’ cost of information processing is lower. Using the Northeast Blackout of 2003 as a natural experiment, I explore an exogenous shock in information acquisition and show causal evidence that information acquisition reduces information asymmetry.

We study momentum and its predictability within equities listed at the London Stock Exchange (1820-1930). At the time, this was the largest and most liquid stock market and it was thinly regulated, making for a good laboratory to perform out-of-sample tests. Cross-sectionally, we find that the size and market factors are highly profitable, while long-term reversals are not. Momentum is the most profitable and volatile factor. Its returns resemble an echo: they are high in long-term formation portfolios, and vanish in short-term ones. We uncover momentum in dividends as well. When controlling for dividend momentum, price momentum loses significance and profitability. In the time-series, despite the presence of a few momentum crashes, dynamically hedged portfolios do not improve the performance of static momentum. We conclude that momentum returns are not predictable in our sample, which casts some doubt on the success of dynamic hedging strategies.