[We introduce a new measure of active portfolio management, Active Share, which represents the share of portfolio holdings that differ from the benchmark index holdings. We compute Active Share for domestic equity mutual funds from 1980 to 2003. We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time. Active Share predicts fund performance: funds with the highest Active Share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence. Nonindex funds with the lowest Active Share underperform their benchmarks.]

We introduce a new measure of active portfolio management, Active Share, which represents the share of portfolio holdings that differ from the benchmark index holdings. We compute Active Share for domestic equity mutual funds from 1980 to 2003. We relate Active Share to fund characteristics such as size, expenses, and turnover in the cross-section, and we also examine its evolution over time. Active Share predicts fund performance: funds with the highest Active Share significantly outperform their benchmarks, both before and after expenses, and they exhibit strong performance persistence. Nonindex funds with the lowest Active Share underperform their benchmarks.

This paper considers the impact of the takeover likelihood on firm valuation. If firms are more likely to acquire when there is more free cash or lower required rates of return, the targets become more sensitive to shocks to cash flows or the price of risk. Ceteris paribus, firms exposed to takeovers have different rates of return than protected firms. Using takeover likelihood estimates, we create a “takeover factor, ” buying (selling) firms with a high (low) takeover likelihood, which generates “abnormal ” returns. Several tests confirm that the takeover factor helps explaining cross-sectional differences in equity returns and is related to takeover activity. This paper considers the impact of the takeover channel on valuation. While it is well known that target shareholders receive a large premium on a takeover, how expectations about takeover premiums affect firm valuation has not been investigated. One possible reason for this lack of interest may be the assumption that differences in takeover exposure are purely idiosyncratic, and hence do not affect a firm’s cost of capital. In that case, the issue of incorporating the takeover channel into valuation is solved by simply adding the expected

[This paper considers the impact of the takeover likelihood on firm valuation. If firms are more likely to acquire when there is more free cash or lower required rates of return, the targets become more sensitive to shocks to cash flows or the price of risk. Ceteris paribus, firms exposed to takeovers have different rates of return than protected firms. Using takeover likelihood estimates, we create a "takeover factor," buying (selling) firms with a high (low) takeover likelihood, which generates "abnormal" returns. Several tests confirm that the takeover factor helps explaining cross-sectional differences in equity returns and is related to takeover activity.]