Hostname: page-component-76fb5796d-5g6vh Total loading time: 0 Render date: 2024-04-26T14:40:28.674Z Has data issue: false hasContentIssue false
  • English
  • Français

Information Barriers in Global Markets: Evidence from International Subcontracting Relationships

Published online by Cambridge University Press:  09 August 2019

Massimo Massa  and
David Schumacher
Massimo Massa
Affiliation:
Massa, massimo.massa@insead.edu, INSEAD
David Schumacher*
Affiliation:
Schumacher, david.schumacher@mcgill.ca, McGill University Desautels Faculty of Management
*
Schumacher (corresponding author), david.schumacher@mcgill.ca
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the link between information barriers in global markets and the organizational form of asset management. Fund families outsource funds in which they are at an informational disadvantage to generate performance. Using a structural model of self-selection, we endogenize the outsourcing decision and estimate positive gains from outsourcing of 4–14 basis points per month, thereby reconciling underperformance of outsourced funds with performance maximization by fund families. The gains from outsourcing provide a novel proxy for the information barriers that segment global financial markets: The more segmented the underlying markets where the funds invest, the larger the gains from outsourcing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 6 , September 2020 , pp. 2037 - 2072
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Viral Acharya, Santiago Bazdresch, Joe Chen (the referee), Jennifer Conrad (the editor), Miguel Ferreira, Pierre Hillion, Soeren Hvidkjaer, Fabian Irek, Andrew Karolyi, Pedro Matos, Michael Melvin, Jonathan Reuter, Sergei Sarkissian, Daniel Schmidt, Laura Veldkamp, and Yan Wang as well as seminar participants at INSEAD, IFABS 2011, the third Luxembourg Asset Management Summit, the IF2015 Annual Conference in International Finance, and the 2015 EFA annual meetings for helpful comments. We thank Judith Kashul for editorial help with the final draft. We are grateful for research support from the Social Sciences and Humanities Research Council of Canada (SSHRC). Schumacher further acknowledges support from the Institute of Financial Mathematics of Montreal (IFM2) and the Fonds de Recherche du Québec (FRQSC). Some results presented here were previously circulated in drafts called “Happy Loser: Subcontracting in International Asset Management” or “Subcontracting in International Asset Management: New Evidence on Market Integration.”

References

Antras, P.“Firms, Contracts, and Trade Structure.” Quarterly Journal of Economics, 118 (2003), 1375–1418.CrossRefGoogle Scholar
Antras, P.“Incomplete Contracts and the Product Cycle.” American Economic Review, 95 (2005), 1054–1073.CrossRefGoogle Scholar
Antras, P., and Helpman, E.. “Global Sourcing.” Journal of Political Economy, 112 (2004), 552–580.CrossRefGoogle Scholar
Barber, B. M.; Huang, X.; and Odean, T.. “Which Factors Matter to Investors? Evidence from Mutual Fund Flows.” Review of Financial Studies, 29 (2016), 2600–2642.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C. R.. “Time-Varying World Market Integration.” Journal of Finance, 50 (1995), 403–444.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C. R.. “Emerging Equity Market Volatility.” Journal of Financial Economics, 43 (1997), 29–77.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C. R.. “Foreign Speculators and Emerging Equity Markets.” Journal of Finance, 55 (2000), 565–613.CrossRefGoogle Scholar
Berk, J. B., and van Binsbergen, J. H.. “Assessing Asset Pricing Models using Revealed Preference.” Journal of Financial Economics, 119 (2016), 1–23.CrossRefGoogle Scholar
Cameron, A. C., and Trivedi, P. K.. Microeconometrics: Methods and Applications. Cambridge, UK: Cambridge University Press (2005).CrossRefGoogle Scholar
Carhart, M. M.“On the Persistence of Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Cashman, G. D., and Deli, D. N.. “Locating Decision Rights: Evidence from the Mutual Fund Industry.” Journal of Financial Markets, 12 (2009), 645–671.CrossRefGoogle Scholar
Chen, J.; Hong, H.; Huang, M.; and Kubik, J. D.. “Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization.” American Economic Review, 94 (2004), 1276–1302.CrossRefGoogle Scholar
Chen, J.; Hong, H.; Jiang, W.; and Kubik, J. D.. “Outsourcing Mutual Fund Management: Firm Boundaries, Incentives and Performance.” Journal of Finance, 68 (2013), 523–558.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G.. “Risk Taking by Mutual Funds as a Response to Incentives.” Journal of Political Economy, 105 (1997), 1167–1200.CrossRefGoogle Scholar
Christensen, H. B.; Hail, L.; and Leuz, C.. “Mandatory IFRS Reporting and Changes in Enforcement.” Journal of Accounting and Economics, 56 (2013), 147–177.CrossRefGoogle Scholar
Cooper, I.; Sercu, P.; and Vanpee, R.. “The Equity Home Bias Puzzle: A Survey.” Foundation and Trends in Finance, 7 (2012), 289–416.CrossRefGoogle Scholar
Chuprinin, O.; Massa, M.; and Schumacher, D.. “Outsourcing in the International Mutual Fund Industry: An Equilibrium View.” Journal of Finance, 70 (2015), 2275–2308.CrossRefGoogle Scholar
Del Guercio, D., and Reuter, J.. “Mutual Fund Performance and the Incentive to Generate Alpha.” Journal of Finance, 69 (2014), 1673–1704.CrossRefGoogle Scholar
Dunbar, C. G.“The Use of Warrants as Underwriter Compensation in Initial Public Offerings.” Journal of Financial Economics, 38 (1995), 59–78.CrossRefGoogle Scholar
Duong, T.“Outsourcing in the Mutual Fund Industry.” Working Paper, Iowa State University (2012).Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Size, Value and Momentum in International Stock Returns.” Journal of Financial Economics, 105 (2012), 457–472.CrossRefGoogle Scholar
Fang, L. H.“Investment Bank Reputation and the Price and Quality of Underwriting Services.” Journal of Finance, 65 (2005), 2729–2768.CrossRefGoogle Scholar
Feenstra, R. C., and Hanson, G. H.. “Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm.” Quarterly Journal of Economics, 120 (2005), 729–761.Google Scholar
Ferreira, M. A., and Matos, P.. “The Colors of Investors’ Money: The Role of Institutional Investors around the World.” Journal of Financial Economics, 88 (2008), 499–533.CrossRefGoogle Scholar
Golubos, A.; Petmezas, D.; and Travlos, N. G.. “When It Pays to Pay Your Investment Banker: New Evidence on the Role of Financial Advisors in M&As.” Journal of Finance, 67 (2012), 271–311.CrossRefGoogle Scholar
Griffin, J. M.“Are the Fama and French Factors Global or Country Specific?” Review of Financial Studies, 15 (2002), 783–803.CrossRefGoogle Scholar
Grossman, G. M., and Helpman, E.. “Integration versus Outsourcing in Industry Equilibrium.” Quarterly Journal of Economics, 117 (2002), 85–120.CrossRefGoogle Scholar
Grossman, G. M., and Helpman, E.. “Outsourcing in a Global Economy.” Review of Economic Studies, 72 (2005), 135–159.CrossRefGoogle Scholar
Harvey, C. R.“The World Price of Covariance Risk.” Journal of Finance, 46 (1991), 111–157.CrossRefGoogle Scholar
Henry, P. B.“Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices.” Journal of Finance, 55 (2002), 529–564.CrossRefGoogle Scholar
Hou, K.; Karolyi, G. A.; and Kho, B.-C.. “What Factors Drive Global Stock Returns?” Review of Financial Studies, 24 (2011), 2527–2574.CrossRefGoogle Scholar
Karolyi, G. A., and Stulz, R.. “Are Financial Assets Priced Locally or Globally?” In Handbook of the Economics of Finance, Vol. 1B, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. North Holland, Netherlands: Elsevier (2003), 975–1020.Google Scholar
Karolyi, G. A., and Wu, Y.. “A New Partial-Segmentation Approach to Modeling International Stock Returns.” Journal of Financial and Quantitative Analysis, 53 (2018), 507–546.CrossRefGoogle Scholar
Lee, L.-F.“Unionism and Wage Rates: A Simultaneous Equations Model with Qualitative and Limited Dependent Variables.” International Economic Review, 19 (1978), 415–433.CrossRefGoogle Scholar
Lewis, K. K.“Trying to Explain Home Bias in Equities and Consumption.” Journal of Economic Literature, 37 (1999), 571–608.CrossRefGoogle Scholar
Li, K., and Prabhala, N. R.. Handbook of Corporate Finance, Vol. 1, North Holland, Netherlands: Elsevier (2007).Google Scholar
Massa, M.“How Do Family Strategies Affect Fund Performance? When Performance Maximization Is Not the Only Game in Town.” Journal of Financial Economics, 67 (2003), 249–304.CrossRefGoogle Scholar
Morck, R.; Yeung, B.; and Yu, W.. “The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?” Journal of Financial Economics, 58 (2000), 215–260.CrossRefGoogle Scholar
Sirri, E. R., and Tufano, P.. “Costly Search and Mutual Fund Flows.” Journal of Finance, 53 (1998), 1589–1622.CrossRefGoogle Scholar
van Nieuwerburgh, S., and Veldkamp, L.. “Information Immobility and the Home Bias Puzzle.” Journal of Finance, 64 (2009), 1187–1215.CrossRefGoogle Scholar
Supplementary material: File

Massa and Schumacher supplementary material

Massa and Schumacher supplementary material

Download Massa and Schumacher supplementary material(File)
File 868.9 KB