Managerial ability premium factor and fund performance. (May 2021)

• Record Type: Journal Article
• Authors: Dong, Feng; Doukas, John A.
• Is Part Of: Journal of international money and finance. Volume 113(2021)
• Publication Date: 2021-05
• Subjects: MAP factor -- Fund management skill -- Corporate managerial ability -- Mutual fund performance; G11 -- G14 -- G23 -- G32; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2021.102353
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: Skilled fund managers use managerial ability as reference when invest. High MA stock-exposure strategy delivers high fund performance. Skilled funds are correlated with negative MAP, indicating high-MA stocks exposure. The profitability of high MA stock-exposure strategy is a long-lived phenomenon. Abstract: We examine whether fund managers use corporate managerial ability (MA) as a point of reference in their portfolio investment decisions and find that skilled fund managers with significant loading on high-MA stocks outperform low-skill managers with low-loading on high-MA stocks by about 6% annually based on FFC 4-factor alpha over the 1990–2017 period. Consistent with our managerial ability premium (MAP) hypothesis we find negative MAP betas for high-selectivity funds (i.e., safer-funds with high exposure on High-MA stocks) and positive MAP betas for low-selectivity funds (i.e., funds with high exposure on Low-MA stocks). The implication of our findings is that the MAP has emerged as a new factor that has been overlooked in prior asset pricing studies.