Essays on agency conflicts in mutual funds

Abstract

This dissertation is comprised of three chapters that analyze agency conflicts in the U.S. mutual funds. The first chapter is an introduction. In the second chapter, I assemble a unique dataset to examine outsourcing in the mutual fund industry. For the population of outsourced mutual funds I document that neither their performance nor their incentive structure differs significantly from mutual funds managed in-house. However, for a smaller sample of funds managed by advisors that concurrently have funds through in-house and outsourced contracts, I document significant under-performance of outsourced funds. Using return gaps and IPO allocations, I find support for the hypothesis that conflicts of interest lead advisors to favor their in-house funds over the funds they manage on behalf of unaffiliated companies. In contrast, I only find weak evidence for the alternative hypothesis that under-performance of outsourced funds is due to differences in risk taking behavior.

In the third chapter, I construct a new measure that tightens the link between stock return patterns around quarter-ends and the likelihood that these patterns result from mutual fund portfolio pumping. Both the level and the concentration of mutual fund ownership explain temporary stock price increases at the end of the quarter. I show that pumping is particularly pronounced among the best- and worst-performing funds and document a distinctive increase in this activity during the 1997-2001 period. The sharp decrease in portfolio pumping after 2001 is most likely due to academic and media attention that spawned investor activism and SEC enforcement actions. These changes in regulatory attention and scrutiny markedly affected the behavior of mutual fund managers.