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Essays on the Investment Decisions of Individual and Institutional Investors

Jame, Russell Elman (2010)
Dissertation (134 pages)
Committee Chair / Thesis Adviser: Shanken, Jay
Committee Members: Chordia, Tarun ; Green, Clifton ; Busse, Jeffrey
Research Fields: Business Administration, General; Economics, Finance
Keywords: Pension Funds; Mutual Funds; Organizational Structure
Program: Laney Graduate School, Business
Permanent url: http://pid.emory.edu/ark:/25593/7txqk

Abstract

Essays on the Investment Decisions of Individual and Institutional Investors
By Russell Jame
This dissertation investigates the investment decisions of individual and institutional investors. In
the first essay, ("Organizational Structure and Fund Performance: Pension Funds vs. Mutual
Funds"), I examine how differences in organizational structure influence the investment choices
and performance of pension funds and mutual funds. I present evidence which suggests that the
additional layers of delegation found in the pension fund industry generate agency costs that
hinder pension fund performance. In the second essay, ("Understanding the S&P 500
Composition Effect: Evidence from Transaction Data", joint work with Clifton Green) we shed
new light on the S&P 500 composition effect by examining the investment decisions of index
funds and individual investors around S&P 500 composition changes. Our central finding is that
that many index funds are willing to accept tracking error in exchange for better execution prices.
In the third essay, ("Retail Investor Industry Herding", joint work with Qing Tong), we examine
the industry wide investment decisions of individuals (retail investors). We find that retail
investors herd into industries, and that industry herding can forecasts industry returns. The
industries most heavily bought by retail investors significantly underperform the industries most
heavily sold by retail investors over the subsequent 3 to 12 months. Taken together, our results
suggest that retail investors categorize stocks by industry, and that industry-wide sentiment
contributes significantly to the poor performance of retail investors.

Essays on the Investment Decisions of Individual and Institutional Investors
By
Russell Jame
BSBA, Georgetown University, McDonough School of Business, 2005
Advisor: Jay A. Shanken, Ph.D., Carnegie Mellon University, 1983
A dissertation submitted to the Faculty of the
James T. Laney School of Graduate Studies of Emory University
in partial fulfillment of the requirements for the degree of
Doctor of Philosophy
in Business
2010

Table of Contents



Table of Contents



Page
Introduction
1


First Essay: Organizational Structure and Fund Performance: Pension Funds vs. Mutual Funds
1. Introduction
3
2. Related Literature

8

3. Data and Descriptive Statistics
9


4. The Investment Decisions of Pension Funds and Mutual Funds
13
5. The Performance of Pension Funds and Mutual Funds
20
6. Conclusion
31
Second Essay: Understanding the S&P 500 Composition Effect: Evidence from Transaction Data
1. Introduction
32
2. Data and Descriptive Statistics
36
3. Stock Returns Following Index Composition Changes
39
4. Index Fund Trading around Index Composition Changes
41
5. The Effects of Index Composition Changes on Investor Recognition 50
6. Conclusion
58
Third Essay: Retail Investor Industry Herding
1. Introduction
60
2. Data and Descriptive Statistics
64
3. Tests for Industry Herding
67
4. Industry Herding and Industry Returns
73

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