Type of Document	Dissertation
Author	Jaiprakash, Puneet
Author's Email Address	pjaiprak@vt.edu
URN	etd-08242011-163903
Title	Two Essays on Equity Mutual Funds
Degree	PhD
Department	Finance, Insurance, and Business Law
Advisory Committee	Advisor Name Title Kumar, Raman Committee Chair Chen, Yong Committee Member Kadlec, Gregory B. Committee Member Keown, Arthur J. Committee Member
Keywords	Fund Flows Conflicts of Interest Semiparametric Regression Flow-performance Relationship Return Predictability Macroeconomic Variables
Date of Defense	2011-08-05
Availability	restricted
Abstract Previous research has shown that expected market returns vary over time and that this variation can be predicted by variables such as dividend yields and book-to-market ratios (Fama and French (1989); Campbell and Thompson (2008)). Further, macroeconomic variables affect asset returns (Flannery and Protopapadikas (2002)). We investigate whether the investment decisions of mutual fund investors incorporate information about future stock returns contained in predictive and macroeconomic variables. If investors incorporate this information, then variation in flows should be related to that in predictive variables and macroeconomic variables. Using quarterly flow data from 1951Q4 to 2007Q4, we find that both predictive and macroeconomic variables have a relatively small impact on flows. Our results suggest that fund investors, as a group, fail to adequately incorporate the information contained in these variables. Existing literature documents that (i) an asymmetric low-performance relationship creates an incentive for managers to extract rents from shareholders, and (ii) managers respond to such incentives by strategically altering portfolio risk. Using the semiparametric regression model proposed by Chevalier and Ellison (1997), we show that the flow-performance relationship has become linear in recent years (2000-2009) and fund managers no longer respond to such incentives. Fund managers, however, change portfolio risk in response to past performance; such changes have a positive impact on fund performance and are indicative of a better alignment of interests between managers and shareholders.
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