Mutual fund managers may decide to deviate from a well-diversified portfolio and concentrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries.

Despite extensive disclosure requirements, mutual fund investors do not observe all actions of fund managers. We estimate the impact of unobserved actions on fund returns using the return gap-the difference between the reported fund return and the return on a portfolio that invests in the previously disclosed fund holdings. We document that unobserved actions of some funds persistently create value, while such actions of other funds destroy value. Our main result shows that the return gap predicts fund performance. (JEL G11, G23) Despite extensive disclosure requirements, mutual fund investors do not observe all actions of fund managers. For example, fund investors do not observe the exact timing of trades and the corresponding transaction costs. On the one hand, fund investors may benefit from unobserved interim trades by skilled fund managers who use their informational advantage to time the purchases and the sales of individual stocks optimally. On the other hand, they may bear hidden costs, such as trading costs, agency costs, and negative investor externalities. In this paper, we analyze the impact of unobserved actions on mutual fund performance.

Hedge funds have become important investors in public companies raising equity privately. Hedge funds tend to finance companies that have poor fundamentals and pronounced information asymmetries. To compensate for these shortcomings, hedge funds protect themselves by requiring substantial discounts, negotiating repricing rights, and entering into short positions of the underlying stocks. We find that companies that obtain financing from hedge funds significantly underperform companies that obtain financing from other investors during the following two years. We argue that hedge funds are investors of last resort and provide funding for companies that are otherwise constrained from raising equity capital. (JEL G14, G23, G32)Hedge funds have recently become an important source of funding for public companies raising equity privately. Financing young companies with severe information asymmetries is an important investment strategy for some hedge funds. Since 1995, hedge funds have participated in more than 50% of the private placements of equity securities and have contributed about one-quarter of the capital raised in such equity issuances, a total investment that has exceeded the contributions of other investor classes. This paper sheds light on the role of hedge funds in such private placements.In perfect financial markets it should be irrelevant whether a firm obtains funding from hedge funds or from other investors. To investigate whether the identity of the investors matters, we use a unique dataset that

Using data on the investments a large number of individual investors made through a discount broker from 1991 to 1996, we find that the stock trades by households with concentrated portfolios outperform those with diversified portfolios. While in general the stocks bought by individual investors significantly underperform the stocks they sell, the reverse is true for households whose holdings are concentrated in a few stocks. The excess return of concentrated relative to diversified portfolios is stronger for households with large account balances as well as for stocks not included in the S&P 500 Index and local stocks, potentially reflecting concentrated investors' successful exploitation of information asymmetries. This finding is very robust to alternative concentration measures and regression specifications, and to alternative explanations such as differences across concentrated and diversified investors in the portfolio turnover and access to inside information, suggesting that some of these concentrated households have superior information processing skills. Moreover, controlling for a household's average investment ability, the household's trades perform better as the household's portfolio includes fewer stocks. However, while concentrated household portfolios on average outperform diversified ones, their levels of total risk are larger and the Sharpe ratios of their stock portfolios are lower.

Mutual funds change their risk levels significantly over time. Risk shifting might be caused by ill-motivated trades of unskilled or agency-prone fund managers who trade to increase their personal compensation. Alternatively, risk shifting might occur when skilled fund managers trade to take advantage of their stock selection and timing abilities. This paper investigates the performance consequences of risk shifting and sheds light on the mechanisms and the economic motivations behind the risk shifting behavior. Using a holdings-based measure of risk shifting, we find that funds that increase risk perform worse than funds that keep stable risk levels over time, suggesting that risk shifting is either an indication of inferior ability or is motivated by agency issues. * We thank

Mutual fund managers may decide to deviate from a well-diversified portfolio and concentrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries. Copyright 2005 by The American Finance Association.

This paper investigates whether investors were compensated for the tax burden of equity securities over the time period between 1913 and 2006. Effective tax rates on equity securities vary over time due to changes in tax rates on dividends and capital gains and due to changes in corporate payout policies. Effective tax rates also vary cross-sectionally due to persistent differences in propensities to pay dividends, which tend to be taxed more heavily than capital gains. The results indicate an economically plausible and statistically significant tax capitalization over time and cross-sectionally.JEL Classification: G12, H20, E44 Keywords: Taxation Caesarea Center Conference, and seminar participants at the American Enterprise Institute, Boston College, the Federal Reserve Bank of New York, Stanford University, the University of California at Berkeley, the University of California at Davis, the University of California at Irvine, the University of Colorado at Boulder, the University of Michigan, the University of Minnesota, the University of Southern California, and the University of Texas at Austin for helpful comments and suggestions. I am grateful to Zhuo Wang for outstanding research assistance and to the Mitsui Life Center at the University of Michigan for financial support. The paper is based on the following two papers that were distributed separately: "Tax Changes and Asset Pricing: Time-Series Evidence" and "Investment Taxes and Equity Returns." Address: McCombs School of Business; University of Texas; 1 University Station, B6600; Austin, TX 78759; Phone: (512) 232-6835; E-mail: clemens.sialm@mccombs.utexas.edu. I IntroductionTaxes have an important impact on effective asset returns for taxable investors. Asset valuations and asset returns should reflect this tax burden in equilibrium. To compensate taxable investors for their tax burden, before-tax asset returns should be higher and asset valuations should be lower in periods of relatively high tax rates. Furthermore, assets facing higher tax burdens, such as stocks paying highly taxed dividends, should offer higher risk-adjusted returns, as derived by Brennan (1970). However, taxes should not affect asset valuations and asset returns if investors can effectively eliminate their tax burden on equity securities, as discussed by Miller and Scholes (1978). This study investigates empirically whether equity valuations and before-tax equity returns are related to their effective tax burdens using a new data set covering personal tax burdens between 1913 and 2006.The effective tax burdens on equity securities vary substantially over time and crosssectionally. I compute effective personal tax rates on equity securities following Poterba (1987b). The aggregate tax burden on equity securities has declined over the last decades as tax reforms reduced the statutory tax rates on dividends and capital gains and as the opportunities to invest in tax-qualified environments such as pensions and tax-deferred retirement accounts were expanded. In addition, corpo...

Participants in defined contribution (DC) retirement plans rarely adjust their portfolio allocations, suggesting that their investment choices and consequent money flows are sticky and not discerning. However, participants' inertia could be offset by DC plan sponsors, who adjust the plan's investment options. We examine these countervailing influences on flows into U.S. mutual funds. We find that flows into funds from DC assets are more volatile and exhibit more performance sensitivity than non-DC flows, primarily due to adjustments to the investment options by the plan sponsors. Thus, DC retirement money is less sticky and more discerning than non-DC money.