Andrea Rossi - Assistant Professor - University of Arizona

Research Interests
Investments and Asset Management (Private Equity, Mutual Funds, Hedge Funds), Financial Markets, Investor Behavior

Publications

1. Industry Familiarity and Trading: Evidence from the Personal Portfolios of Industry Insiders with Itzhak (Zahi) Ben-David and Justin Birru, Journal of Financial Economics, in press. (SSRN Link) (JFE Link)
Presentations: University of Cincinnati (2015), The Ohio State University (2015), Case Western Reserve University (2016), Ohio University (2016), Drexel University (2015)

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

Working Papers

1. 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), MFA (2019), European Investment Forum (University of Cambridge, 2019)

Abstract
When a private equity firm raises a larger fund, performance tends to decline relative to the previous funds it managed. This pattern is usually interpreted as evidence of decreasing returns to scale. I argue that this inference is unwarranted. In essence, private equity firms 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 90% and 80% smaller and statistically insignificant for buyout and venture capital funds, respectively. The silver lining is that, historically, private equity fund managers have been able to keep decreasing return at bay. Additional analyses suggest that doing so is harder for VCs than it is for buyout firms.

Key Insights
- Successful PE partnerships raise larger funds, then tend to underperform themselves; this phenomenon is normally 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

2. What do Mutual Fund Investors Really Care About? with Itzhak (Zahi) Ben-David, Jiacui Li, and Yang Song (Download Here)
Presentations: The Ohio State University (2018), Boston College (2018), University of Arizona (2018), Pacific Northwest Finance Conference (2018), Southern Methodist University (2018), UT Dallas (2018), Finance Research Conference (2018), Annual Young Scholars Finance Consortium at University of Texas A&M (2019), China International Conference in Finance (2019), Harvard Business School (2019), SFS Cavalcade North America (2019), University of Utah (2019), University of Virginia (2019), American Finance Association Meeting (2020 scheduled)