Essays on information and institutional investors
Abstract
This thesis includes two essays analyzing two separate topics. The first essay investigates the role of asymmetric information in explaining one of the major puzzles in International Finance. The second essay investigates what kind of performance information that the financial institutions use to evaluate their managers. Essay 1 investigates the impact of asymmetric information on the international equity home bias puzzles, the observation that holdings of foreign assets are substantially below that predicted by standard portfolio choice models. The essay explicitly introduces information costs in a rational expectation model where investors differ in their levels of initial wealth. The model introduces information acquisition and investment decisions made by each investor. The results show that the investors with larger wealth acquire information about the foreign asset and information is conveyed to the uninformed investors through the price, while the uninformed investors only receive partial information and thus their demand for the foreign asset is relatively low. The model differs from the existing literature on home bias in that it explains not only aggregate home bias but also different degrees of home bias across investors. Both a unique pension fund data and a survey data set provide consistent support for the implications of the model. Essay 2 investigates mutual fund manager replacement using a rank-order performance approach. Adopting Morningstar ratings as a measure of fund performance, we find that fund managers are more likely to be replaced if the fund they oversee has had a low performance rating history. This effect is particularly strong for a low-rated fund that is downgraded and for a high-rated fund that is upgraded in the ratings. Comparisons between Morningstar ratings and alternative measures of fund performance indicate that Morningstar ratings have explanatory power in predicting manager turnover. Further we confirm that individual investors do respond to the Morningstar measure of rank-order performance.
Degree
Ph.D.
Advisors
Barron, Purdue University.
Subject Area
Finance|Economic theory
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