This paper examines the relationship between mutual fund managers’ ownership and the disposition effect. Using recently disclosed managerial ownership data required by new SEC rules, we document that a significant number of mutual funds exhibit the disposition effect. Funds with managerial ownership exhibit significantly less disposition effect than those without, and the disposition measure decreases with managers’ percentage ownership. We also find that the disposition effect is negatively related to the degree of board independence and fund performance. Our findings suggest that the disposition effect is significantly affected by fund governance and higher managerial ownership may help mitigate the problem.

This paper studies the joint effect of borrowing and short-sale constraints under heterogeneous beliefs and risk aversions. Although the constraints never simultaneously bind in equilibrium, interesting economics emerge in the anticipatory effects of potentially future binding constraints. In particular, the risk-free rate and Sharpe ratio experience endogenous jumps at a critical state, where two equilibria coexist. Moreover, a short-sale ban can lead to a lower stock price and higher volatility depending on the relative tightness between the constraints, and tightening the borrowing constraint during a short-sale ban can also make returns more volatile.

The involvement of the Communist Party of China in corporate decision-making has formed a corporate governance model with “Chinese characteristics” that diverges from commonly studied governance models. This paper aims to provide direct insight into China’s corporate governance model by examining how the involvement of Party organizations in corporate governance influences the performance of private firms. To address endogeneity concerns, we use a quasi-natural experiment (i.e., sudden deaths of board directors) that leads to an exogenous change in the proportion of Party directors. Using difference-in-differences estimation, we find that an increase in the proportion of Party directors (i.e., stronger political governance) improves private firms’ performance. This finding is robust to various tests. Moreover, the channel analysis suggests that the Party organization performs advisory and supervisory functions in corporate governance. Last, we present evidence that the excessive involvement of the Party organization in corporate governance also imposes political costs on private firms.

We study mutual fund mergers between 1999 and 2001 to understand the role and effectiveness of fund boards. Some fund mergers—typically across-family mergers—benefit target shareholders but are costly to target fund directors. Such mergers are more likely when funds underperform and their boards have a larger percentage of independent trustees, suggesting that more-independent boards tolerate less underperformance before initiating across-family mergers. This effect is most pronounced when all of the fund's directors are independent, not the 75% level of independence required by the SEC. Higher-paid target fund boards are less likely to approve across-family mergers that cause substantial reductions in their compensation.

A major threat to the development of financial markets in emerging markets is “tunneling.” In China, this took on the form of controlling shareholders diverting assets from listed firms or coercing firms to serve as guarantors on questionable loans. A new set of rules enacted in 2005 prohibited asset diversion for “non-operational” purposes. Firms complying with these rules have experienced a reduction in related party transactions, an increase in investment, and better performance. In contrast, another set of contemporary rules, which aimed to standardize the practice of firms providing loan guarantees, has had very little impact. We attribute the contrasting design, implementation, and effectiveness of these two sets of rules to the difference in enforcement costs of the two types of tunneling activities. Relative to loan guarantees, it is much easier for a third party to determine (ex ante) whether a particular form of diversion destroys firm value, and to verify (ex post) that the losses to the firm resulted from the diversion. Our results highlight the importance of enforceability—laws and regulations that can be enforced at lower costs are more likely to succeed, especially in countries with underdeveloped formal institutions.

This paper investigates the determinants of the Troubled Asset Relief Program (TARP) funds distribution to banks and the stimulus effect of TARP investments on credit supply in the economy. Using banks’ political and regulatory connections as instruments, this paper finds that TARP investments increased bank loan supply by an annualized rate of 6.36% for banks with below median Tier 1 capital ratios. This increase is found in all major types of loans and can be translated into $404 billion of additional loans for all TARP banks. On average, TARP banks employed about one-third of their TARP capital to support new loans and kept the rest to strengthen their balance sheets. Furthermore, there is little evidence that loans made by TARP banks had lower quality than those by non-TARP banks. In sum, this paper shows a positive stimulus effect of TARP on credit supply during the 2008–2009 financial crisis.

This paper provides an in depth analysis of an investor's reluctance to realize losses and his propensity to realize gains – a behavior known as the disposition effect. Together, sophistication (static differences across investors) and trading experience (evolving behavior of a single investor) eliminate the reluctance to realize losses. However, an asymmetry exists as sophistication and trading experience reduce the propensity to realize gains by 37% (but fail to eliminate this part of the behavior.) Our research design allows us to follow an individual's behavior from the start of his investing life/career. This ability makes it possible to track the evolution of the disposition effect as it is reduced and/or disappears.Our results are robust to alternative explanations including feedback trading, calendar effects, and frequency of observation.

By using a unique data set on the organizational structure of fixed-income portfolio managers, that is, mutual funds and insurance companies, we study the effects of organizational hierarchy within a fund management team on bond investing. We document that team hierarchies reduce the portfolio managers’ incentive to collect and share soft information. Funds with multiple hierarchies invest less in bonds of local firms, hold less concentrated portfolios, and herd more with the market. Overall, they deliver lower portfolio performances. We also show that changes in fund hierarchy subsequently find their way into fund behaviors.

The use of options as compensation for non-executive employees is a puzzle. Standard, rational, valuation models show that the cost of issuing options is larger than the value placed on the options by employees. Existing explanations for this puzzle are based upon static models that ignore the considerable dynamic aspects of employee stock option pricing and exercise behavior. We develop dynamic, multiperiod models of employee preferences considering risk aversion, loss aversion, overconfidence and probability weighting to test possible explanations of the use of employee stock options. We find that a cumulative prospect theory model generates scenarios where employees would prefer options to either cash or equity payments, and also optimally exercise their options early. This is the only model where options are preferred and also optimally exercised early.

We study pre‐trade transparency by looking at the introduction of NYSE's OpenBook service that provides limit‐order book information to traders off the exchange floor. We find that traders attempt to manage limit‐order exposure: They submit smaller orders and cancel orders faster. Specialists' participation rate and the depth they add to the quote decline. Liquidity increases in that the price impact of orders declines, and we find some improvement in the informational efficiency of prices. These results suggest that an increase in pre‐trade transparency affects investors' trading strategies and can improve certain dimensions of market quality.