We introduce a conditional measure of skill, the correlation between a funds' residual trades, net of common trading motives, and future news about the stocks traded. Using this measure, we show that the average mutual fund manager in the cross-section has stock-picking skill. This result is...

We investigate the effects of contractual arrangements on the portfolio risk choice of outsourced mutual funds. Outsourced funds display two times more strategic risk-shifting than in-house managed funds. After instrumenting for a fund's outsourcing status, we further establish a causal...

We analyze the investment behavior of affiliated funds of mutual funds (AFoMFs), which are mutual funds that can only invest in other funds in the family, and are offered by most large families. Though never mentioned in any prospectus, we discover that AFoMFs provide an insurance pool against...

We analyze the investment behavior of affiliated funds of mutual funds (AFoMFs), which are mutual funds that can only invest in other funds in the family, and are offered by most large families. Though never mentioned in any prospectus, we discover that AFoMFs provide an insurance pool against...

A large literature explores whether asset returns comove in excess of what can be explained by fundamentals, thus suggesting the existence of frictions or behavioral biases. However, we show that comovement is a ubiquitous feature of asset returns that will arise in the presence of latent or...

We find that Credit Rating Agencies (CRAs) see through transitory shocks to credit risk that stem from transitory shocks to equity prices, while market-based measures of credit risk do not. For a given stock return, CRAs are significantly less likely to downgrade firms with transitory shocks...

Most mutual fund managers have performance-based contracts that are incomplete. We study risk-shifting implications emanating from these contracts. Our theory predicts that mutual fund managers with asymmetric contracts and mid-year performance close to their announced benchmark increase their...

Individuals are overconfident, especially those in positions to influence outcomes. The impact of hiring an overconfident portfolio manager is studied here within the standard principal-agent framework. When compensation is endogenously determined, we find that investors can benefit from...