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We develop a dual-layered agency model to study blockholder monitoring by activist funds competing for investor flow. Competition for flow affects the manner in which activist funds govern as blockholders. In particular, funds inflate their short-term performance by increasing payouts that are financed by higher (net) leverage. Doing so subsequently discourages value-creating interventions during economic downturns because of debt overhang. Our theory suggests a new channel via which asset manager incentives may foster economic fragility and links together the observed procyclicality of activist investments with the documented effect of such funds on the leverage of their target companies. (JEL G34, G23) Received July 2, 2020; editorial decision August 8, 2020; Editor Uday Rajan.

We provide a comprehensive overview of the role of institutional investors in corporate governance with three main components. First, we establish new stylized facts documenting the evolution and importance of institutional ownership. Second, we provide a detailed characterization of key aspects of the legal and regulatory setting within which institutional investors govern portfolio firms. Third, we synthesize the evolving response of the recent theoretical and empirical academic literature in finance to the emergence of institutional investors in corporate governance. We highlight how the defining aspect of institutional investors – the fact that they are financial intermediaries – differentiates them in their governance role from standard principal blockholders. Further, not all institutional investors are identical, and we pay close attention to heterogeneity amongst institutional investors as blockholders.

We provide a comprehensive overview of the role of institutional investors in corporate governance with three main components. First, we establish new stylized facts documenting the evolution and importance of institutional ownership. Second, we provide a detailed characterization of key aspects of the legal and regulatory setting within which institutional investors govern portfolio firms. Third, we synthesize the evolving response of the recent theoretical and empirical academic literature in finance to the emergence of institutional investors in corporate governance. We highlight how the defining aspect of institutional investors – the fact that they are financial intermediaries – differentiates them in their governance role from standard principal blockholders. Further, not all institutional investors are identical, and we pay close attention to heterogeneity amongst institutional investors as blockholders.

We investigate whether business ties with portfolio firms influence mutual funds' proxy voting using a comprehensive data set spanning 2003 to 2011. In contrast to prior literature, we find that business ties significantly influence promanagement voting at the level of individual pairs of fund families and firms after controlling for Institutional Shareholder Services (ISS) recommendations and holdings. The association is significant only for shareholder-sponsored proposals and stronger for those that pass or fail by relatively narrow margins. Our findings are consistent with a demand-driven model of biased voting in which company managers use existing business ties with funds to influence how they vote. [ABSTRACT FROM AUTHOR]

In firms with multiple blockholders governance via exit is affected by how blockholders react to each others' exit. Institutional investors, who hold the majority of equity blocks, are heterogeneous in their incentives. How do these incentives affect the manner in which institutional blockholders respond to each others' exit? We present a model that shows that open-ended institutional investors, who are subject to investor redemption risk, will be sensitive to an informed blockholder's exit, giving rise to correlated exits and strengthening governance. Thus, exposure to redemption risk, universally a negative force in asset pricing, plays a positive role in corporate governance. Using data on engagement campaigns by activist hedge funds we present large-sample evidence consistent with our theoretical mechanism.

We show that supply side effects arising from the bond holdings of open-end mutual funds affect corporate credit risk. In our model, funds exposed to flow-performance relationships are reluctant to refinance bonds of companies with poor cash flow prospects fearing future investor outflows as a result of potential default events. This lowers refinancing prices, enhancing incentives for strategic default by equityholders, engendering a positive association between bond funds’ presence and credit risk. Empirically, we find that in firms with poor cash flow prospects, active fund bond holdings are associated with increased CDS spreads, more so when funds are more sensitive to flows. We use an instrumental variable approach and a quasi-experiment based on the departure of Bill Gross from PIMCO to address the endogeneity between fund holdings and credit spreads.

Effective monitoring by equity blockholders is important for good corporate governance. A prominent theoretical literature argues that the threat of block sale (“exit”) can be an effective governance mechanism. Many blockholders are money managers. We show that, when money managers compete for investor capital, the threat of exit loses credibility, weakening its governance role. Money managers with more skin in the game will govern more successfully using exit. Allowing funds to engage in activist measures (“voice”) does not alter our qualitative results. Our results link widely prevalent incentives in the ever-expanding money management industry to the nature of corporate governance

What determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the “ground zero” country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models that allows us to take into account the uncertainty regarding the appropriate set of regressors. We find that institutional similarity to the ground zero country plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favour of the “wake-up call” hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods.

We present results of photometric monitoring campaigns of G, K and M dwarfs in the Pleiades carried out in 1994, 1995 and 1996. We have determined rotation periods for 18 stars in this cluster. In this paper, we examine the validity of using observables such as X-ray activity and amplitude of photometric variations as indicators of angular momentum loss. We report the discovery of cool, slow rotators with high amplitudes of variation. This contradicts previous conclusions about the use of amplitudes as an alternate diagnostic of the saturation of angular momentum loss. We show that the X-ray data can be used as observational indicators of mass-dependent saturation in the angular momentum loss proposed on theoretical grounds., Comment: 24 pages, LaTex (AASTeX); includes 8 postscript figures and 4 Latex tables. To appear in ApJ, Feb. 1, 1998. Postscript version of preprint can be obtained from http://casa.colorado.edu/~anitak/pubs.html

We investigate how business ties with portfolio firms influence mutual funds’ proxy voting using a comprehensive dataset spanning 2003 to 2011. In sharp contrast to the prior literature, we show that the proxy voting of mutual funds is significantly influenced by their business ties with portfolio firms. Our result holds at the level of individual proposals after robustly controlling for unobserved heterogeneity across firms and fund families and over time as well as for the e?ects of ISS recommendations and fund family holdings. We also show that the influence of business ties on proxy voting is strongest for highly contested shareholder proposals where proxy votes are most relevant for firm value. Finally, we show that the prominent class action lawsuits of 2006 against 401(K) sponsors and providers had di?erential e?ects on the voting of di?erent fund families depending on whether they were sued, thus unearthing a potential link between investor attention and corporate governance.

Do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets? To address this issue, we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals. Even abstracting from signalling, the presence of the large investor does make all other traders more aggressive in their selling. Relative to the case in which there is no large investor, small investors attack the currency when fundamentals are stronger. Yet, the difference can be small, or non-existent, depending on the relative precision of private information of the small and large investors. Adding signalling makes the influence of the large trader on small traders' behaviour much stronger. Copyright 2004, Wiley-Blackwell.

Publicly traded corporations are a¤ected by a core agency problem: managers pay the full cost of e¤ort in running the corporations but shareholders enjoy most of the bene?ts. When ownership is dispersed individual shareholders have little incentive to monitor managers and little ability to in?uence them. Holders of equity blocks (?blockholders?) are a natural solu- tion to this problem. Because they own many shares they have both the incentive to monitor and the ability to in?uence management. Several well-known papers (e.g. Grossman and Hart (1980), Shleifer and Vishny (1986), Admati, P?eiderer, and Zechner (1994) and Kahn and Winton (1998)) have shown that blockholders can increase ?rm value through monitoring and activism. Activism can take the form of bringing forth shareholder proposals, proxy voting against management, informal negotiations with management, jawboning etc. These activities are collectively referred to as the use of ?voice?by blockholders.

Mutual funds hold large blocks of shares in many major corporations. Practitioners and regulators alike have been concerned that mutual funds use their proxy votes in a promanagement manner in order to garner lucrative pensions administration contracts, thus hindering shareholder value. Such concerns led the SEC to mandate the disclosure of mutual fund proxy votes starting in 2003. We present a simple model of mutual fund proxy voting in the presence of potential business ties. Our model generates clean predictions on how funds would vote both prior and subsequent to mandatory disclosure. We provide theoretical foundation for the limited activism of mutual funds and demonstrate that mandatory disclosure is not a panacea. We also show that the strategic interaction between multiple mutual fund blockholders of comparable size can generate counterintuitive non-monotone relationships with relevant empirical implications.

In this paper we develop a simple theoretical model to analyze the impact of institu- tional herding on asset prices. A growing empirical literature has come to the intriguing conclusion that institutional herding positively predicts short-term returns but nega- tively predicts long-term returns. We o¤er a theoretical resolution to this dichotomy. In our model, career-concerned money managers interact with pro?t-motivated proprietary traders and security dealers endowed with market power. We show that the reputational concerns of fund managers imply an endogenous tendency to imitate past trades, which impacts the prices of the assets they trade. In our main result, we show that institutional herding positively predicts short-term returns but negatively predicts long-term returns. Our theory thus provides a simple and uni?ed framework within which to interpret the empirical literature on the price impact of institutional herding. In addition, our paper generates several new testable predictions linking institutional herding behavior, trading volume, and the time-series properties of stock returns.

In this paper we develop a simple theoretical model to analyze the impact of institutional herding on asset prices. A growing empirical literature has come to the intriguing conclusion that institutional herding positively predicts short-term returns but negatively predicts long-term returns. We offer a theoretical resolution to this dichotomy. In our model, career-concerned money managers interact with profit-motivated proprietary traders and security dealers endowed with market power. The reputational concerns of fund managers imply an endogenous tendency to imitate past trades, which impacts the prices of the assets they trade. We show that institutional herding positively predicts short-term returns but negatively predicts long-term returns. In addition, our paper generates several new testable predictions linking institutional herding behavior, trading volume, and the time-series properties of stock returns.

How does the trading behaviour of institutional money managers affect stock prices? In this paper we document a robust relationship between the net trade patterns of institutional money managers and long term equity returns. Examining quarterly data on US institutional holdings from 1983 to 2004, we find evidence that stocks that have been persistently bought (sold) by institutions in the past 3 to 5 quarters underperform (overperform) the rest of the market in the next 12 to 30 months. Our results are of a similar magnitude to, but distinct from, other known asset pricing anomalies. Furthermore, we find that institutional investors show an aggregate tendency to trade in the direction of past institutional trades, buying stocks that have been persistently bought and selling stocks that have been persistently sold. We present a simple model of career-concerned trading by delegated portfolio managers that generates results consistent with our empirical findings.

What determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the "ground-zero" country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models which allows us to take into account the uncertainty regarding the appropriate set of regressors. We find that institutional similarity to the ground-zero country plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favour of the "wake up call" hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods.

In many firms managers play the role of administrators, adding value by successfully implementing solutions to problems that the firm may face. We model the career concerns of administrators. When administrators receive the same in formation but differ in their administrative abilities, we show that they may not choose tasks that are appropriate for the problems they face. In particular, in any pure strategy equilibrium of our model, administrators do not condition their behavior on any of their private information, despite the fact that they are risk neutral and know their administrative ability. We thus identify a novel source of incentive conflicts in firms. We also examine the robustness of these results to various extensions.

On 28-29 June 2007, the Financial Markets Group organised a conference covering topics under all three themes of its title, 'Cycles, Contagion and Crises', from the perspective of both developed and emerging economies.

This article is a revised version of an invited lecture delivered at the Jornadas di Economia Conference of the Banco Central di Uruguay on 30th and 31st of July 2001. We thank the officers of the bank and other conference participants for their comments.

We study how the presence of multiple participation opportunities coupled with individual learning about payoffs affects the ability of agents to coordinate efficiently in global coordination games. Two players face the option to invest irreversibly in a project in one of many rounds. The project succeeds if some underlying state variable è is positive and both players invest, possibly asynchronously. In each round they receive informative private signals about è, and asymptotically learn the true value of è. Players choose in each period whether to invest or to wait for more precise information about è. We show that with sufficiently many rounds, both players invest with arbitrarily high probability whenever investment is socially efficient, and delays in investment disappear when signals are precise. This result stands in sharp contrast to the usual static global game outcome in which players coordinate on the risk-dominant action. We provide a foundation for these results in terms of higher order beliefs.

How does the trading behaviour of institutional money managers affect stock prices? In this paper we document a robust relationship between the net trade patterns of institutional money managers and long term equity returns. Examining quarterly data on US institutional holdings from 1983 to 2004, we find evidence that stocks that have been persistently bought (sold) by institutions in the past 3 to 5 quarters underperform (overperform) the rest of the market in the next 12 to 30 months. Our results are of a similar magnitude to, but distinct from, other known asset pricing anomalies. Furthermore, we find that institutional investors show an aggregate tendency to trade in the direction of past institutional trades, buying stocks that have been persistently bought and selling stocks that have been persistently sold. We present a simple model of career-concerned trading by delegated portfolio managers that generates results consistent with our empirical findings.

What determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the “ground-zero” country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models which allows us to take into account the uncertainty regarding the appropriate set of regressors. We find that institutional similarity to the ground-zero country, as measured by quality of governance indicators, plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favour of the “wake up call” hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods and may be sensitive to the specification of the prior.JEL Classification: F31, F32, C11Keywords: Financial contagion; Currency crises; Governance; Bayesian Model Averaging

This paper studies how the introduction of social learning with costs to delay affects coordination games with incomplete information. We present a tractable noisy dynamic coordination game with social learning and costs to delay. We show that this game has a unique monotone equilibrium. A comparison of the equilibrium of the dynamic game with the equilibria of analogous static coordination games explicates the role of social learning. The analysis is carried out for both endogenous and exogenous order of moves in the dynamic game. In the limit as noise vanishes, social welfare is strictly ranked in these games, with the highest welfare achieved in the dynamic game with endogenous ordering. We demonstrate that exogenous asynchronicity is not a substitute for endogenous asynchronicity. We also show that under endogenous ordering, as noise vanishes, the efficiency of coordination is maximized at intermediate costs to delay. The robustness of these results is illustrated numerically away from the complete information limit, when closed forms are not avail-able. Our results have implications for the initial public offerings of debt, as well as for the adoption of new technology under incomplete information.

Financial contagion is modeled as an equilibrium phenomenon in a dynamic setting with incomplete information and multiple banks. The equilibrium probability of bank failure is uniquely determined. We explore how the cross holding of deposits motivated by imperfectly correlated regional liquidity shocks can lead to contagious effects conditional on the failure of a financial institution. We show that contagion is possible in the unique equilibrium of the economy and characterize exactly when it may exist. At the same time, we identify a direction of flow for contagious effects, which provides a rationale for localized financial panics. Simulations identify the optimal level of interbank deposit holdings in the presence of contagion risk. Our results suggest that when the probability of bank failure is low, maximal levels of interbank holdings are optimal. When cross holding of deposits is complete, we demonstrate that the intensity of contagion is increasing in the size of regionally aggregate liquidity shocks.

We incorporate strategic complementarities into a multi-agent sequential choice model with observable actions and private information. In this framework agents are concerned with learning from predecessors, signalling to successors, and coordinating their actions with those of others. Coordination problems have hitherto been studied using static coordination games which do not allow for learning behavior. Social learning has been examined using games of sequential action under uncertainty, but in the absence of strategic complementarities (herding models). Our model captures the strategic behavior of static coordination games, the social learning aspect of herding models, and the signalling behavior missing from both of these classes of models in one unified framework. In sequential action problems with incomplete information, agents exhibit herd behavior if later decision makers assign too little importance to their private information, choosing instead to imitate their predecessors. In our setting we demonstrate that agents may exhibit either strong herd behavior (complete imitation) or weak herd behavior (overoptimism) and characterize the informational requirements for these distinct outcomes. We also characterize the informational requirements to ensure the possibility of coordination upon a risky but socially optimal action in a game with finite but unboundedly large numbers of players.

Let Sylp(G) denote the set of Sylow p-subgroups of a finite group G. We say that G has Property Ip if, for any S∈Sylp(G) and U, V[les ]G, S∩U∈Sylp(U) and S∩V∈Sylp(V) implies S∩U∩V∈Sylp (U∩V). Below, every group is assumed to be finite.

We have calculated a simple model of the expected Kuiper Belt (KB) small grain population and the thermal emission that would arise from such grains. We have also sought observational evidence for this emission. The model assumed equilibrium between grain creation by collisional fragmentation of comets and removal by Poynting-Robertson radiation drag, radiation pressure-driven ejection, mutual collisions, and sublimation. The model far-IR intensity scales as the square of total KB mass. Comparison of our model with observations of the zodiacal dust rules out emission from trans-Neptunian dust representing more than about 0.3 M of KB comets. This agrees with recent HST reports of a population of comet-sized bodies in the KB which has a minimum mass of about 0.04 M, although that population can be extrapolated to include as much as 1 M in the volume of our model. The model KB dust fractional bolometric luminosity (Ldust/Lstar) would have about 10-2 and 10-4 of the values for the grain disks around Vega and β Pic, respectively. A preliminary search in COBE DIRBE data reveals nonuniform bands near the ecliptic of cold (T = 20-30 K) emission prominent at wavelengths of 140 and 240 μm but not prominent relative to zodiacal emission at shorter (IRAS) wavelengths. Most of this emission is probably not from solar system material.