[We develop a stock return-predictive measure based on an efficient aggregation of the portfolio holdings of all actively managed U.S. domestic equity mutual funds, and use this model to study the source of fund managers' stock selection abilities. This "generalized inverse alpha" (GIA) approach reveals differences in the ability of managers to predict firms' future earnings from fundamental research. Notably, the GIA's return-forecasting power is not subsumed by publicly available quantitative predictors, such as momentum, value, and earnings quality, nor is it subsumed by methods shown in past research to forecast stock returns using fund holdings or trades.]

We show that the commonly observed correlation between institutional investor ownership and the success of mergers is partly driven by active stock picking. Several mutual fund stock selection skill measures strongly predict the post-merger performance of corporate acquirers even after controlling for possible shareholder monitoring. These findings are stronger for funds with characteristics more indicative of active stock picking. Moreover, firms held by funds with higher stock selection skills are more likely to subsequently become acquirers, suggesting that the mutual fund skill set includes the ability to identify acquirers with value-enhancing acquisition opportunities.

We develop a stock return-predictive measure based on an efficient aggregation of the portfolio holdings of all actively managed U.S. domestic equity mutual funds, and use this model to study the source of fund managers' stock-selection abilities. This generalized-inverse alpha (GIA) approach reveals differences in the ability of managers to predict firms' future earnings from fundamental research. Notably, the GIA's return-forecasting power is not subsumed by publicly available quantitative predictors, such as momentum, value, and earnings quality, nor is it subsumed by methods shown in past research to forecast stock returns using fund holdings or trades.

Active equity mutual funds managed by insurance companies underperform peer funds by over 1% per year. There is no evidence that insurance funds make less risky investments; instead they have lower risk-adjusted returns and their fund flows are less sensitive to performance when they perform poorly. Across insurance funds, those with heavy advertising, directly established by insurers or using parent firms' brandnames, and those whose managers simultaneously manage substantial non-mutual-fund assets, are more likely to underperform. We conclude that insurers' efforts to cross-sell mutual funds aggravate agency problems that erode fund performance.

We perform portfolio-level analyses to understand insurance firms’ preferred habitat behavior in the government bond market. Based on portfolio durations and portfolio weights across maturities, we find that interest rate risk exposures of insurers’ portfolios are related to their operating liabilities and financing constraints. We show that this habitat behavior significantly affects bond pricing. During the “quantitative easing” era, bond purchases by the Federal Reserve have a larger impact on the yields of Treasury bonds with a higher habitat demand.

We identify large discontinuous changes, known as jumps, in daily stock prices and explore the role of jumps in cross-sectional stock return predictability. Our results show that small and illiquid stocks have higher jump returns to the extent that cross-sectional differences in jumps fully account for the size and illiquidity effects. Based on value-weighted portfolios, jumps also account for the value premium. On the other hand, jumps are not the cause of momentum or net share issue effects. The findings of our study shed new light on stock return dynamics and present challenges to conventional explanations of stock return predictability.

We show that firms’ R&D activities can predict the stock returns of their industry peers. When an industry experiences substantial R&D growth driven by the activities of a small group of firms, industry peers experience positive abnormal returns and abnormal operating performance despite having no aggressive R&D growth. Exogenous industry shocks to demand or productivity do not explain these results. Further, abnormal returns are concentrated in peer firms that receive low investor attention.

Ang, Hodrick, Xing, and Zhang (2006a) show that stocks with high idiosyncratic return volatility tend to have low future returns. This paper further documents that idiosyncratic volatility is inversely related to future earning shocks, and more importantly, that the return-predictive power of idiosyncratic volatility is induced by its information content about future earnings. We examine various explanations of the triangular relation among idiosyncratic volatility, future earning shocks, and future stock returns. Our results show that the idiosyncratic volatility anomaly is not a simple manifestation of previously documented market anomalies related to excessive extrapolation on firm growth, over-investment tendency, accounting accruals, or investor underreaction to earnings news. On the other hand, there is evidence that the idiosyncratic volatility anomaly is related to corporate selective disclosure, and the anomaly is stronger among stocks with a less sophisticated investor base.