Agapova, Anna

Information asymmetry literature has developed models that explain the relation
between uninformed traders and informed traders. In general, these models have shown
that first, information asymmetry is a driving force for investor buying and selling
behavior. Second, the trades of informed investors reveal some of the information they
possess suggesting that the trades of informed investors are informative to market
makers. Third, when information about a stock enters the market, the characteristics of
the firm can change, e.g., a better information environment reduces the cost of capital
(Admati, 1985; Easley and O‟Hara, 2004; Wang, 1993).
In this study, I apply information asymmetry theory to explore the trading
behavior of active equity mutual fund managers and their role as facilitators of
information. In the first essay, I study the information environment of firms mutual funds
choose to add to their holdings and how it changes after the inclusion. I identify all new
additions to the mutual fund holdings universe from 2002 to 2015 and compare them to the available universe of firms not yet owned by mutual funds. I find that active
equity mutual fund managers behave as informed investors and prefer to buy stocks with
more opaque information environments i.e., firms with larger spreads, lower trading
volume, smaller firms with more growth opportunities, and firms that tend to use more
accruals. Fund managers also show a preference for firms that have less analyst
following, those in which analysts are less likely to agree on their EPS estimates, and
firms in which analysts are more likely to err in their predictions. In other words, mutual
fund managers prefer firms that are more likely to be mispriced. Once the funds include
the firms, I document a strong improvement in their information environment. Firms
attract more analyst coverage, reduce its use of accruals, produce more guidance, increase
their market cap, and show increased turnover.
The second essay focuses on the herding behavior of mutual funds. The study is
the first to document the herding of mutual fund managers after creation of toehold
positions by portfolio managers. I use a hand-collected dataset consisting of all toehold
acquisitions reported to the SEC from 1995 to 2015 to document a strong herding
reaction of active equity mutual funds after toehold announcements. This herding
reaction is several times stronger than other mutual fund herding events reported by
previous literature. I also document that the strength of the herding reaction varies
depending on the identity of the filer or the characteristics of the firm acquired. The
herding reaction is stronger for toehold announcements of firms with a smaller market
capitalization, better growth opportunities, and those that are more illiquid. I also find
that the herding reaction is weaker after the filings of hedge fund managers. My results
support the informational herding cascade hypothesis.

The first essay introduces a portfolio theory motivated approach to measuring
mutual fund family-level diversification and hedging strategies. Diversification of
idiosyncratic risk (systematic risk) is measured by the average cross-fund correlation in
idiosyncratic returns (predicted returns from the multifactor model). Using new
methodology, I find evidence of cross-sectional variation in family-level diversification
and examine several fund families’ characteristics as the determinants of this crosssectional
variation. On average, fund families that offer more objectives are more
diversified in terms of both idiosyncratic and systematic risks; however, in the subsample
of larger fund families, greater number of objectives is associated with increase
(decrease) in idiosyncratic (systematic) risk diversification. Families that concentrate in
the retail sector are more diversified. I also find that less diversification of idiosyncratic
risk on the family level is associated with better risk-adjusted performance, while greater diversification of systematic risk is associated with greater performance during an
economic downturn.
The second essay examines whether new measures of diversification are
additional determinants of fund family flows and flow volatility. I find that fund family
capital flows increase in systematic risk focus, as more of the fund family’s assets are
held by institutional investors. Family flow volatility decreases in diversification of
systematic risk during market downturn, increase in market uncertainty and during
recession. I further find that families with greater concentration in the retail sector
(institutional sector) exhibit less family capital flow volatility as the diversification of
systematic risk (idiosyncratic risk) increases. Fund-level volatility of focused and
concentrated funds within diversified families is greater than in less diversified families,
signaling that diversification on the family level may decrease participation costs for the
investors. Moreover, in support of participation cost hypothesis, I find that the
performance of worst performing funds within fund families increases in the family-level
diversification; thus, family-level diversification affects the convexity in the fund flowperformance
relation documented in the previous studies. On the family-level,
diversification is associated with convexity in flow-performance relation, while family
focus with more direct flow-performance relation.

This study investigates the effects of energy price shocks on exchange rate volatility in
five major energy-producing countries Russia, Brazil, Mexico, Canada, and Norway. There are
noticeable differences in the behavior of the exchange rate between emerging markets and
advanced economies. Russia and Brazil exhibit different patterns from those of Canada and
Norway in the direction and magnitude of conditional exchange rate volatility. The R2 for Russia
and Brazil more than doubles when oil prices are incorporated into the fundamental model, but it
increases only slightly for Canada and Norway. Our VAR analysis indicates that a one-standarddeviation
increase in oil prices causes all currencies to appreciate after the shock, but the postshock
adjustment process is relatively short in Norway and Canada and longer in Russia, Brazil,
and Mexico. Our empirical analysis further reveals that there is evidence for positive
overshooting in Russia and Brazil, and negative overshooting in Canada and Mexico. The
asymmetric behavior of exchange rate volatility among countries seems to be related to the
efficiency of financial and foreign exchange markets rather than to the importance of oil
revenues in an economy.

I empirically investigate the managements’ decision to voluntarily disclose strategic information. While carrying a benefit of reduced information asymmetry, strategic information disclosure carries a cost of investors disagreeing with managements’ strategy and thus refusing to provide funding to the firm. Using a hand- collected sample of information releases, I identify firm characteristics that affect the likelihood of strategic information disclosure.