UC Davis

This dissertation includes three essays on mutual funds and stock returns, specifically onactive mutual funds’ style change and skill, on passive or index funds’ fees and investors’ sensitivity, and on stock market exits and return anomaly, using econometric methods and large mutual fund and individual stock datasets.

The first chapter shows that active equity funds deliberately alter their factor loadingsrather than maintaining a constant style. Changes are larger following quarters in which funds either under- or out-perform other funds based on returns or fund flows. Motivated by this observation, we identify a new measure of manager skill, which we call “tactical investment skill.” It captures a manager’s ex-ante observable ability to increase future returns through loadings changes. We show that high-skill managers outperform their low-skill peers in the following month in terms of raw returns and alphas. This outperformance is more pronounced following quarters with large loadings changes.

The second chapter identifies index funds as a special setting to estimate investors’ feesensitivity. Before-fee returns of different funds that track the same index should all equal to the index return and thus fees become a major consideration. There is a more steady and larger decline in asset-weighted average expense ratio, compared with the simple average. Investors concentrate more on low-fee funds. The further examination shows that one basis point difference in monthly fund fees is negatively related with a monthly flow difference of 0.12% for S&P 500 index funds.

The third chapter predicts the two most common stock market exits – mergers and drops– using logit models based on firm-level variables and analyzes the returns of stocks that have high exit probabilities. Such analysis is important for investors given that frequent exits are partly responsible for the large U.S. listing gap (Doidge, Karolyi, and Stulz (2017)). High merger probability stocks have positive three-factor alphas and lower-than-average volatility. Firms with high drop probabilities have anomalously negative three-, four-, and five-factor alphas between -1.8% and -4% per month. Results are robust to controlling for the effects of skewness, volatility, and turnover on returns.