We study the impact of the tournament-like competition in the mutual fund industry by examining the Active Share choices of funds. Funds with relatively poor performance by the end of the third quarter in a calendar year tend to increase their Active Share during the last quarter. The increase in the trailing funds’ Active Share is accompanied by an increase in the funds’ downside risk exposure. The evidence suggests that the strategic shifts in Active Share we document are not information/skill motivated.

ABSTRACT We hypothesize that active mutual funds can promote corporate social responsibility (CSR) in their portfolio firms through stock trading activities. Leveraging mutual fund family mergers to identify causal effects, we find that a firm’s CSR commitment increases when its mutual funds exhibit stronger CSR preferences through trading. This effect is stronger when mutual fund investors are more active or when the firm’s stock exhibits higher liquidity. Additionally, our results suggest that the trading channel complements non-trading mechanisms through which active mutual funds influence firm CSR.

We provide a tradeoff model of the capital structure that allows leverage to be a function of a firm’s choice of tax aggressiveness. The model’s testable implications are supported empirically. Debt use is inversely related to corporate tax aggression for most firms, and the relation is economically important. This substitution effect is especially evident for firms exhibiting high tax-shelter prediction scores. The effect attenuates for benign forms of tax avoidance and during the recent credit crisis period. For the most profitable firms, debt and tax aggression are complements. Our results extend the empirical findings of Graham and Tucker (2006).

We document the heterogeneous effects of turnover on mutual fund performance, which help explain the weak cross-sectional turnover-performance relations reported in existing studies. For funds skilled in exploiting short-term investment opportunities, there is a positive empirical relation between turnover and performance. For unskilled funds, the relation turns negative. As a result, performance persistence is stronger among funds with higher turnover. Further, we find that the heterogeneous effects of turnover on performance are not driven by liquidity premium or trade execution skills, but rather due to substantial dispersion in short-term stock selection information.

We construct a new measure of trading regularity, capturing the extent to which investors trade on a regular basis. Institutional investors that regularly trade outperform those that trade less regularly. The performance of funds that regularly trade persists for at least a year. Among those who trade most regularly, larger funds perform relatively worse, because they incur higher transaction costs associated with their larger trades. Institutions that regularly trade generate superior performance, in part, by behaving as contrarians and by trading more aggressively on information. By contrast, we find no relation between trading regularity and performance among index funds. Received November 21, 2016; editorial decision March 28, 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.