Research Interests
Investments and Asset Management (Private Equity, Mutual Funds, Hedge Funds), Investor Behavior, Entrepreneurship and Corporate Finance
Investments and Asset Management (Private Equity, Mutual Funds, Hedge Funds), Investor Behavior, Entrepreneurship and Corporate Finance
Working Papers
Decreasing Returns or Reversion to the Mean? The Case of Private Equity Fund Growth (Download Here)
Presentations (excluding job market talks): European FMA (2017), The Ohio State University (2017), Southern California Private Equity Conference (2018), UCLA (2018, scheduled)
Presentations (excluding job market talks): European FMA (2017), The Ohio State University (2017), Southern California Private Equity Conference (2018), UCLA (2018, scheduled)
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Abstract
In private equity fund data, there exists an economically large negative association between fund growth and performance at the partnership level. This is usually interpreted as evidence of decreasing returns to scale. I argue that this inference is unwarranted. In essence, Bayesian-informed expectations reveal that the partnerships whose funds have grown the most were on average lucky in the past; as that luck reverts to zero, a spurious negative association between growth and returns is generated in the data. Controlling for this bias, the effect of growth on performance is about 80% smaller and statistically insignificant for both buyout and venture capital funds. Furthermore, I show that, historically, decreasing returns do not seem to have played a major role in the erosion of performance persistence in private equity. These results have implications for fund managers’ and investors’ decisions, and for our understanding of the private equity industry. |
Key Insights
- Successful PE partnerships raise larger funds, then tend to underperform themselves; this phenomenon is interpreted by academics and investors as evidence of decreasing returns to scale (DRS) - New perspective: past success is partially due to "luck"; reversion to the mean in larger follow-on funds creates spurious DRS evidence - Bias-free DRS estimates are negative, but small and statistically insignificant - Bayesian test suggest small impact of DRS on performance persistence - DRS are likely larger for VC than for Buyout 
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Forthcoming Publications
Industry Familiarity and Trading: Evidence from the Personal Portfolios of Industry Insiders with Itzhak (Zahi) Ben-David and Justin Birru, Journal of Financial Economics, forthcoming. (SSRN Link)
Presentations: University of Cincinnati (2015), The Ohio State University (2015), Case Western Reserve University (2016), Ohio University (2016)
Presentations: University of Cincinnati (2015), The Ohio State University (2015), Case Western Reserve University (2016), Ohio University (2016)
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Abstract
We study whether industry familiarity is an advantage in stock trading by exploring the trading patterns of industry insiders in their own personal portfolios. To do so, we identify accounts of industry insiders in a large dataset provided by a retail discount broker. We find that insiders trade firms from their own industry more frequently. Furthermore, they earn abnormal returns exclusively when trading own-industry stocks, especially obscure stocks (small, low analyst coverage, high volatility). In a battery of tests, we find no evidence of the use of private information. The results are most consistent with the interpretation that industry familiarity is an advantage in stock trading. |
Key Insights
- First study to explore stock portfolio of corporate insiders (executives etc.) - Insiders display a trading tilt towards own-industry stocks; inconsistent with desire to diversify exposure to industry of employment - Significant abnormal returns earned when trading within own industry - Insignificant performance outside own industry - Performance is stronger in hard-to-value stocks - No "smoking gun" for the use of private information (e.g., earnings, M&As...) - Specialized industry knowledge can be leveraged to generate outperformance 
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