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Jul 28

Essays in Institutional Investor Behavior

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My job market paper introduces a new measure of portfolio holdings that has power to explain future fund abnormal returns. This measure is defined as “return on portfolio innovation.” It is constructed as the return on completely new portfolio positions that a fund has not held before. I evaluate the return on newly added positions because their performance can signal the quality of managerial effort. On average, a one-standard deviation increase in the return on innovation increases the Carhart (1997) four-factor fund alpha by approximately 0.34 to 0.52 percent per year. The results have important implications for fund performance and manager behavior.

The second essay (with Edward Nelling) examines institutional trading activity around patent publication dates. Unlike previous studies that use the future citations count to proxy for patent value, we measure the value of innovation by the three-day cumulative abnormal returns (CARs) around announcements. We find no correlation between CARs around the patent publication date and future number of citations. This calls into question whether the value of a patent can be estimated using forward citations. Our main finding is that there is a strong positive association between CARs around patent publication dates and the change in abnormal institutional demand. Specifically, the change in abnormal demand is greater when the institutional shareholder base of a company consists of a higher percent of long-term institutions. Overall, these results suggest that institutions contribute to financing of innovation by enhancing the liquidity of a company’s stock.

The final essay (with Edward Nelling) explores whether institutional investors exhibit herding behavior by property type in real estate investment trusts (REITs). Our analysis of changes in institutional portfolio holdings suggests strong evidence of herding behavior. Although momentum trading explains a small amount of this herding, institutional property type demand is more strongly associated with lagged institutional demand than lagged returns. Most of the correlation in demand is attributed to institutional investors following trades of other institutional investors. The results reveal that correlated information signals seem to drive institutional property type herding, and institutional investors are likely to infer information about REIT property types from each others’ trades.

Committee Chair: Edward Nelling, Professor of Finance Committee Member: Eliezer Fich, Associate Professor of Finance and Joseph Neubauer Research Scholar in Finance Committee Member: Daniel Dorn, Associate Professor of Finance and Dornsife Fellow Committee Member: Greg Nini, Assistant Professor of Finance Committee Member: Clemens Sialm, Professor of Finance and Eleanor T. Mosle Fellow, University of Texas at Austin, and Research Associate, National Bureau of Economic Research

PhD Candidate