Previous work shows large differences in fees for S&P 500 index funds and other funds and suggests that investors suffer wealth losses investing in high-fee funds when similar low-fee funds are available. In contrast, the neoclassical model of mutual funds (Berk and van Binsbergen, 2015, J. Financ. Econ., 118, 1–20) argues that percentage fees are irrelevant, as fund size will adjust in equilibrium such that net alphas are equal to zero. We show that fees matter from an investor perspective. We document (i) a strong negative association between net-of-fee fund performance and fees in a sample of all US and international equity funds, (ii) economically large, robust, persistent, and pervasive fee dispersion in the mutual fund industry, and (iii) important economic effects for investors. During the sample period, the mutual fund industry has generated a total value lost (i.e., a negative net value added) of 125 billion USD, coming predominantly from high-fee funds.

In this paper, we examine the predictability of the cross-section of bank stock returns by taking advantage of the unique set of industry characteristics that prevail in the financial services sector. We examine predictability in the cross-section of bank stock returns using information contained in individual bank fundamental variables such as income from derivative usage, previous loan commitments, loan-loss reserves, earnings, and leverage. We find that variables related to non-interest income, loan-loss reserves, earnings, leverage, and standby letters of credit are all univariately important in forecasting the cross-section of bank stock returns. Surprisingly, neither book-to-market nor firm size is important in our sample. We examine whether this cross-sectional predictability is due to increased risk, or another explanation, such as investor under or overreaction. Our results suggest that this predictability is not due to increased risk, but rather is consistent with investor underreaction to changes in banks’ fundamental variables. Furthermore, out-of-sample testing demonstrates this underreaction appears to be exploitable using simple cross-sectional trading strategies.

The percentage of U.S. equity mutual funds that outperform the SPY ETF over the last 30 years decreases substantially as the horizon over which returns are measured is increased. Further, some funds with positive monthly alpha estimates have negative long-horizon abnormal returns. These results reflect positive skewness in the distribution of fund returns that increases with horizon, and highlight the limitations of conditional arithmetic means of short-horizon returns (e.g., alpha) for long-horizon investors. We tabulate an aggregate wealth loss of $1.02 trillion to mutual fund investors over our 30-year sample, when opportunity costs are based on beta-adjusted SPY returns.

We propose that fitted values from market-wide regressions of firm returns on lagged firm characteristics provide useful benchmarks for assessing whether average returns to certain stocks are abnormal. To illustrate, we study eight documented events with abnormal returns, including credit rating and analyst recommendation downgrades, initial and seasoned public equity offerings, mergers and acquisitions, dividend initiations, share repurchases, and stock splits. We show that the apparently abnormal returns in the months after these events are substantially reduced or eliminated when compared to characteristic-based benchmarks. Characteristic-based benchmarks perform better in explaining post-event returns than do recent four- and five-factor models. Received September 19, 2016; editorial decision February 16, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web Site next to the link to the final published paper online.

We investigate stock price reactions to Internet-related name changes in a market downturn. In contrast to the Internet boom period, during which there was a surge of dot.com additions, in the bust period, there is a dramatic reduction in the pace of dot.com additions accompanied by a rapid increase in dot.com name deletions. Following the Internet “crash” of mid-2000, investors react positively to name changes for firms that remove dot.com from their name. This dot.com deletion effect produces cumulative abnormal returns on the order of 64% for the 60 days surrounding the announcement day. Our results add support to a growing body of literature that documents that investors are potentially influenced by cosmetic effects and that managers rationally time corporate actions to take advantage of these biases.

ABSTRACT We test for firm‐level asset investment effects in returns by examining the cross‐sectional relation between firm asset growth and subsequent stock returns. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks. When we compare asset growth rates with the previously documented determinants of the cross‐section of returns (i.e., book‐to‐market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross‐section of U.S. stock returns.

ABSTRACT We test overreaction theories of short‐run momentum and long‐run reversal in the cross section of stock returns. Momentum profits depend on the state of the market, as predicted. From 1929 to 1995, the mean monthly momentum profit following positive market returns is 0.93%, whereas the mean profit following negative market returns is −0.37%. The up‐market momentum reverses in the long‐run. Our results are robust to the conditioning information in macroeconomic factors. Moreover, we find that macroeconomic factors are unable to explain momentum profits after simple methodological adjustments to take account of microstructure concerns.

ABSTRACT We document a striking positive stock price reaction to the announcement of corporate name changes to Internet‐related dotcom names. This “dotcom” effect produces cumulative abnormal returns on the order of 74 percent for the 10 days surrounding the announcement day. The effect does not appear to be transitory; there is no evidence of a postannouncement negative drift. The announcement day effect is also similar across all firms, regardless of the firm's level of involvement with the Internet. A mere association with the Internet seems enough to provide a firm with a large and permanent value increase.

We show that positive flows to active mutual funds with high recent returns partially reverse at longer horizons. This outcome is robust across a broad range of alternative specifications. Reversal occurs from greater outflows associated with high prior returns, not reduced inflows. We test theories to explain the reversal: investment life cycles, tax loss selling, and a behavioral “disappointment” hypothesis based on investors’ overreaction to positive returns. While both tax loss selling and short investor life cycles can contribute, the evidence supports a role for investor disappointment, whereby investors redeem their capital when return performance fails to meet expectations.

ABSTRACT We develop a new and comprehensive database of firm‐level contributions to U.S. political campaigns from 1979 to 2004. We construct variables that measure the extent of firm support for candidates. We find that these measures are positively and significantly correlated with the cross‐section of future returns. The effect is strongest for firms that support a greater number of candidates that hold office in the same state that the firm is based. In addition, there are stronger effects for firms whose contributions are slanted toward House candidates and Democrats.