We document the role that inside investment plays in managerial compensation and hedge fund performance. Merging against a comprehensive dataset of US hedge funds, we find that funds with greater inside investment outperform on a factor-adjusted basis. We emphasize the role of capacity constraints in explaining this result: insider funds are smaller, are less likely to accept inflows in response to positive returns, and are more likely to be closed to outside investors. These results suggest that managers earn outsize rents by operating trading strategies further from their capacity constraints when managing their own money.
We study the real effects of environmental activist investing. Using plant-level data in a quasi-experimental setting, we find that firms targeted by environmental activist investors reduce their toxic releases, greenhouse-gas emissions, and cancer-causing pollution through preventative efforts. Improvements in air quality within a one-mile of targeted plants suggest potentially important externalities to local economies. We provide evidence supporting the external validity of environmental activism while also ruling out reporting biases, forms of selection, and other alternative hypotheses. Overall, our study suggests that engagements are an effective tool for long-term shareholders to address climate change risks.
Liquidity and Longevity, Bequest Adjustments Through the Life Settlement Market
Access to wealth is vital for our rapidly aging population. This paper studies the financial decisions of individuals nearing their end of life and examines if access to such wealth can enable longevity. I use transaction-level data from the secondary market for life insurance policies, also known as the life settlement market. In this quasi-experimental evaluation of bequest adjustments, I show that the ability to access wealth through the life settlement market leads to a significant increase in longevity. This effect is stronger for people in fragile health, with severe disease diagnoses, and those with limited access to hospitals. The regional supply of primary healthcare, and the social-economic background of the policyholder does not seem to explain the longevity effect. Taken together, these results appear to be related to the high-cost of care for individuals and the importance of financial liquidity for people nearing their end of life.
The Impossibility of Communication Between Investors
All investors face the same decision problem: either invest for themselves or delegate their portfolio problem to an outside investor. Typically, asset managers can communicate their superior knowledge to attract capital. However, such communication comes with the risk of revealing the particulars of their valuable information without a commitment from potential investors. I explore this fundamental investment-delegate problem through developing an entropy-based model of communication, where investors endogenously determine to be a principal or an agent in a highly generalizable setting.