Three essays on the associations between investor holdings, portfolio risk, and expected returns

Tacon, Paul Bernard (2012). Three essays on the associations between investor holdings, portfolio risk, and expected returns PhD Thesis, UQ Business School, The University of Queensland.

       
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Author Tacon, Paul Bernard
Thesis Title Three essays on the associations between investor holdings, portfolio risk, and expected returns
School, Centre or Institute UQ Business School
Institution The University of Queensland
Publication date 2012
Thesis type PhD Thesis
Supervisor Jason Hall
Irene Tutticci
Total pages 160
Total colour pages 1
Total black and white pages 159
Language eng
Subjects 150201 Finance
150205 Investment and Risk Management
Formatted abstract This thesis focuses on two aspects of investor behavior. At the macroeconomic level, I consider the general implications of investor flow into and out of equities on firm value. At the microeconomic level, I identify the propensity for managers to alter portfolio risk in a subjective manner. The thesis consists of three essays.

The first essay looks at the association between breadth of ownership (i.e., the size of the investor base) and firm value. I use a unique dataset pertaining to large Australian-listed firms to show that changes in breadth of ownership lead stock returns. In the contemporaneous case, returns decrease in breadth of ownership, while at one-month horizons, increases in breadth of ownership predict higher stock returns. These associations are stronger for individual versus non-individual investors. Furthermore, the strength of these associations increase in a short-sales constrained setting, which suggests that sentiment rather than awareness drives changes in stock ownership.

The second and third essays shift attention to portfolio risk management by sophisticated investors. In the second essay, I show that factors apart from active portfolio rebalancing explain an association between mutual fund performance and subsequent volatility of returns--the tournament hypothesis. An implicit assumption of the hypothesis is that managers intentionally modify portfolio risk in response to interim out- or underperformance. Yet, associations between interim performance and subsequent volatility remain present even in the absence of portfolio rebalancing within tournaments. Moreover, any such rebalancing generates changes in volatility bearing no relation to interim performance. I conclude that managers may alter holdings to control portfolio risk, but it does not appear to be predicated on prior performance.

The third essay considers portfolio risk preferences. I present empirical evidence to support the preferred risk habitat hypothesis for sophisticated investors--mutual fund managers exhibit a tendency to hold stocks with similar return volatilities. Looking at quarterly portfolio holdings (2003-2010), these investors hold portfolios in which the volatilities of stocks held are more concentrated than otherwise predicted by chance. My findings are robust to fund style and stock awareness. Regarding performance, funds that hold volatility-concentrated portfolios exhibit more volatility than their less-specialized counterparts for no incremental returns.
Keyword Investor flows
Short-sales constraints
Mutual funds
Risk shifting
Tournaments
Narrow framing

 
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