Premium Essay

Asymmetric Information, Portfolio Managers, and Home Bias

In: Business and Management

Submitted By kathrynteo
Words 22109
Pages 89
Asymmetric Information, Portfolio Managers, and Home Bias
Wioletta Dziuda

Jordi Mondria

Kellogg School of Management

UNC Chapel Hill

February 2012
First version: February 2009

Abstract
We propose a model of delegated asset management that can explain the following empirical regularities observed in international markets: (i) the presence of home bias, (ii) the lower proportion of mutual funds investing domestically, and (iii) the higher ability and market value of mutual funds investing domestically. In the model, heterogeneous fund managers choose whether to specialize in domestic or foreign assets. Individual investors are uncertain about managers’abilities to generate abnormal returns, and they are more informed about domestic markets than foreign markets. As a result, they are better able to evaluate the ability of managers who specialize in domestic assets. This makes domestic investments less risky and generates home bias. Home bias is magni…ed by the managers’specializations: since ability is rewarded more in the domestic market, higher ability managers invest domestically, making domestic assets more attractive to the investors. Wioletta Dziuda, Kellogg School of Management, Northwestern University, email: wdziuda@kellogg.northwestern.edu; Jordi Mondria, Department of Economics, University of North Carolina at
Chapel Hill, email: mondria@email.unc.edu. We are grateful to Philippe Bacchetta, Markus Brunnermeier,
Matthew Doyle, Juan Carlos Hatchondo, Christian Hellwig, Van Thi Tuong Nguyen, Azeem Shaikh, Jonathan
Vogel, Mirko Wiederholt, and Vivian Yue for very useful conversations, and to seminar and conference participants at AFA 2010, CEA 2009, CEPR Meetings on Global Interdependence 2009, Cowles Foundation Summer
Conference 2009, MFA 2009, NASMES 2009, and Saskatchewan for useful comments.

1

Introduction…...

Similar Documents

Free Essay

Asymmetric Information & Market Failure

...|Discuss the reasons why asymmetric information can be a source of market failure. Use examples to illustrate your answers. | |By Andrew Sweeting | |November 1998 | |Introduction | |This essay is concerned with the issue of information in microeconomics, particularly where information is a factor in the failure of| |individual markets in an economy. Economic information and its importance in microeconomics is initially discussed, and continues | |with defining asymmetric information, which is a factor that can lead to a market failure. | |In the analysis of asymmetric information in markets, ex ante and ex post asymmetries information are discussed in relation to market| |transactions. Ex ante asymmetric information can be explained through Adverse Selection in relation to quality of goods in the | |product market, and ex post asymmetric information can be explained through Moral Hazard in insurance markets. Strategies to correct | |market failure(s) caused by these information asymmetries is addressed for each example discussed. ...

Words: 1028 - Pages: 5

Premium Essay

Information Technology for Managers

...Portal Model The Name-Your-Price Model The Comparison Pricing Model The Demand Sensitive Pricing model The B2B Exchange Model The storefront Model • Storefront model enables merchants to sell products on the Web – Transaction processing, security, online payment, information storage • E-commerce allows companies to conduct business 24-by-7, all day everyday, worldwide • An e-commerce storefront should include: – Online catalog of products – Order processing – Secure payment – Timely order fulfillment The Auction Model • Online auction sites – Act as forums through which Internet users can log-on and assume the role of either bidder or seller – Collect a commission on every successful auction – Sellers post items they wish to sell and wait for buyers to bid • Reserve price – The minimum price a seller will accept in a given auction • Reverse auctions – Allow the buyer to set a price as sellers compete to match or even beat it The Portal Model • Portal sites – Give visitors the chance to find almost everything they are looking for in one place • Horizontal portals – Portals that aggregate information on a broad range of topics – Yahoo!, AltaVista, Google • Vertical portals – Portals that offer more specific information within a single area of interest – WebMD, IMDB • • Comparison pricing model – Web sites using shopping technology to find the lowest price for a given item Demand-sensitive pricing model Page 1 • • – Group buying reduces price as volume of sales......

Words: 5449 - Pages: 22

Free Essay

The Role of Anchoring Bias in the Equity Market

...implications of these potential cognitive biases for investors and, even more so for managers, are less understood. This study considers the behavior of financial market participants from a perspective different from that of previous research. It focuses on anchoring bias, a topic that has been characterized by Hirshleifer (2001) as an important part of “dynamic psychology-based assetpricing theory in its infancy” (p. 1535). “Anchoring” describes the fact that, in forming numerical estimates of uncertain quantities, adjustments in assessments away from some initial value are often insufficient. One of the first studies of this cognitive bias is the seminal experiment by Kahneman and Tversky (1974). These authors report that estimates of an uncertain proportion (the percentage of African nations in the United Nations) were affected by a number between 0 and 100 that was determined by spinning a wheel of fortune in the subjects’ presence. Subsequent research (reviewed in Section 2) has confirmed the generality and the robustness of this cognitive bias. We hypothesize that market participants such as sell-side analysts and investors may also be affected by such anchoring bias when they estimate the future profitability of a firm. This estimation is a complex task that involves a high degree of uncertainty. This suggests that market 2 participants may anchor on salient but irrelevant information. In particular, our discussions with financial analysts suggest......

Words: 4553 - Pages: 19

Premium Essay

Portfolio

...passionately, never failing to impress. This man standing outside my cell tells me this is not my country, then why does it feel like I’m right at home? He says I’m not like him, then why do I feel like he’s like me? I, prisoner number 786, stick my head out through these iron bars. I stare towards the heavens as a white fairy descends from the village of dreams. I don’t know who she is, but she talks like she’s all mine. When I listen to her, it feels like I want to go out there and live again. When she makes all those fake promises, she makes me want to believe in myself again. I, prisoner number 786, stick my head out through these iron bars. I see a new me, fulfilling my old promises and weaving new dreams. He asks me why am I empty and why am I angry? He tells me to open my eyes and just focus for a second, tells me my mind is my only weapon. I, prisoner number 786, stick my head out through these iron bars. I see my girl smiling at me. She tells me that my country doesn’t feel like hers, then why does she call it home? She too tells me I am nothing like her, then why does she feel like she’s everything like me? She tells me she doesn’t belong to me anymore, then why does she still fight the world for me? I, prisoner number 786, stick my head out through these iron bars. I see that I’ve put down my sword and walked away. Trying to find home, forgetting that I lost my way... Of Prisoners & Superheroes 1 Writing Process Prisoner No. 786 was one of my first attempts......

Words: 5142 - Pages: 21

Premium Essay

The Impact of Information Technology on Middle Managers

...Nayab 1 Nayab Asim Professor’s Name Sample Test 27 February 2014 The Impact of Information Technology on Middle Managers The technological advancements have brought a revolution in various industries. It is been assumed that a number of industries will be shut down due to these technological expansion. Not only the industries will get affected by it but also the organizational structures of the firms will be affected by it. It is being predicted widely that information technology is going to reduce the middle managers because as we all know that middle manager’s responsibilities are mostly related to performing coordination tasks between top management and operations management and with the progress in information technology, these tasks are predicted to be done by various IT software. By doing so, companies will have lesser hierarchal levels and efficiency will be increased. For example the information systems can help top management in taking decisions related to operations and functions of their firm. They do not need to call a meeting of four to five managers and to report them frequently. This would save the time and cost, eventually benefiting the firm. Levitt and Whistler (1982) said that the culture of managerial jobs will be totally changed and they have warned the middle managers to organize and get themselves ready for this dramatically changing environment of organizations. On the other hand Simon (1977) has Nayab 2 argued that this......

Words: 375 - Pages: 2

Premium Essay

Asymmetric Information and Capital Structure

...Assignment 4 FIN 534 Rafael Diaz Strayer University 08/25/2010 PROBLEM 28 ASYMMETRIC INFORMATION AND CAPITAL STRUCTURE Info Systems Technology (IST) manufactures microprocessor chips for use in appliances and other applications. IST has no debt and 100 million shares outstanding. The correct price for these shares is either $14.50 or $12.50 per share. Investors view both possibilities as equally likely, so the shares currently trade for $13.50. IST must raise $500 million to build a new production facility. Because the firm would suffer a large loss of both customers and engineering talent in the event of financial distress, managers believe that if IST borrows the $500 million, the present value of financial distress costs will exceed any tax benefits by $20 million. At the same time, because investors believe that managers know the correct share price, IST faces a lemons problem if it attempts to raise the $500 million by issuing equity. Question a. Suppose that if IST issues equity, the share price will remain $13.50. To maximize the long term share price of the firm once its true value is known, would managers choose to have equity or borrow the $500 million if i. they know the correct value of the shares is $12.50? SOLUTION If the firm knows that the correct value of the shares is $12.50, the correct thing to do to raise the $500 million would be by issuing equity. The share price would be overpriced at $13.50 so by issuing......

Words: 734 - Pages: 3

Premium Essay

Portfolio Performance

...PORTFOLIO PERFORMANCE EVALUATION- LITERATURE REVIEW Deepa Chandrashekar Table of Contents 1. Introduction........................................................................................................................................... 2 2. Portfolio Returns Calculation................................................................................................................ 4 2.1. 2.2. Value weighted rate of return........................................................................................................ 6 2.3. 3. Time weighted rate of return......................................................................................................... 5 Internal rate of return .................................................................................................................... 6 Literature Review.................................................................................................................................. 7 3.1. Sharpe ratio ................................................................................................................................... 9 3.2. Sortino ratio ................................................................................................................................10 3.3. Treynor ratio ...............................................................................................................................12 3.4. Jensen......

Words: 5335 - Pages: 22

Premium Essay

Home Delivered Meals Information System

...Management Information Systems Fall Semester 1999 Class Project: Home Delivered Meals Information System (HDMIS) Project Overview Allegheny County, like other American metropolitan areas, is facing the prospect of a “graying” population: the “baby boom” generation born in the middle 1940s – early 1960s is approaching retirement age and, while their parents’ generation is already retired, and the younger “baby bust” and “Generation X” cohorts are having fewer children than their immediate ancestors. In addition, Allegheny county, like most other metropolitan areas, is facing the “hollowing out” syndrome in which population has left the center city (in this case the city of Pittsburgh) for suburban areas as well as areas beyond the immediate Pittsburgh region. However, Pittsburgh, unlike most metropolitan areas, has also faced, and continues to face, stagnation in overall population growth: there are few in-migrants to replace those not born due to a low birth rate and those who leave for better opportunities elsewhere. Thus, the population of elderly is shifting from the city to the suburbs over time (see Figure 1 and http://www.hdm.heinz.cmu.edu). This information is quite relevant for one sector of the economy: that devoted to services for the elderly. As people age, they are more likely to be homebound and thus in need of home-delivered services such as physical therapy, home cleaning, full-time nursing care and......

Words: 5434 - Pages: 22

Free Essay

Portfolio Managers Review

...PORTFOLIO MANAGER’S REVIEW A Monthly Publication of BeyondProxy LLC  September 30, 2010  Subscribe at www.manualofideas.com When asked how he became so successful, Buffett answered: “we read hundreds and hundreds of annual reports every year.” Edited by the Manual of Ideas Research Team “If our efforts can further the goals of our members by giving them a discernible edge over other market participants, we have succeeded.” Top Five Ideas In This Report Lavendon (London: LVD) ………………… p. 16 Nokia (Helsinki: NOK1V, NYSE: NOK) .. 20 OMV (Vienna: OMV, OTC: OMVKY) …. 24 OPAP THE EUROPEAN VALUE ISSUE ► Snapshot of 100 European value opportunities ► 45 European “magic formula” companies ► 45 book value bargains by country ► 20+ companies profiled by MOI research team ► Top 5 ideas, based on proprietary MOI methodology ► Plus: Superinvestor holdings update ► Plus: Favorite stock screens for value investors ► Plus: Exclusive interview with Ciccio Azzolini (Greece: OPAP, OTC: GOFPY) .. 28 Premier Foods (London: PFD, OTC: PRRFY) ….. 32 Also Inside Editor’s Commentary …………….. p. 4 Superinvestor Holdings Update …. p. 9 45 European MF Companies …… p. 10 Interview: Ciccio Azzollini ……… p. 12 Top 5 European Ideas ……………p. 16 Other European candidates …….. p. 36 Euro Book Value Bargains ……. p. 100 100 Cheap European ADRs …….p. 114 About Portfolio Manager’s Review Our goal is to bring you investment ideas that are......

Words: 8940 - Pages: 36

Premium Essay

Information Technology at Homes Style

...business units. The top management has made a decision of going for an ERP system with out taking feed back from hotel managers. They have not considered if the ERP would be in line with their business focus and would help in achieving their business goals. The vision was to get information technology to support the top management in controlling branding, marketing and operations. The entities of the company puts a strain on the information collection process and also in deciding what information need to be collected as the resorts deals with tours and conferences and the hotels have direct contact with customer who are making reservations. The business did not fully buy into the need for information management system. One person was brought onboard to understand the IT function and delivery challenge. Hotels confidential allows for increased risk protection and only gathers information for top management once a week. Clear reservations offers increased content management along with data mining capabilities, it also offers role based screens. Fred Gains wanted to go with clear reservations while Bonheur wanted hotels confidential which meant a problem with control and organization vision. The company should first have a frame work in place defining who would be making decisions either top management or the respective hotel managers and all the managers at the hotels have to be aware of it and have to agree to that management style. Organizational vision need to be......

Words: 591 - Pages: 3

Premium Essay

Analysis of the Components of Project Portfolio Management and Impact on Project Managers.

...of project portfolio management and impact on project managers. Introduction Organizations with mature portfolio management practices have higher rates of resilience to overcome business challenges (Rise above the competition with portfolio management, no date). Project portfolio management (PPM) is a centralized management of practices, processes, methodologies and measuring techniques used for strategic pipeline flow, project prioritization, change management, resource management, portfolio evaluation and risk management. The objective is to ensure that the strategic business objectives such as revenue growth, cost reduction, regulatory mandate, business continuity, among others, are achieved. Key Components of project portfolio management Strategic pipeline flow. This component includes the processes of screening of project proposals and funneling them through the portfolio. Proposals which are developed from the agreed business strategies are screened and selected to go to the next phase of business case development. The business case is then examined and validated by all the relevant stakeholders and possibly external consultants. A decision is followed to include the project in the portfolio with a predetermined resource and timeframe in line with the strategic plan. The projects in the portfolio are monitored and assessed periodically whether they may continue, differ or stop based on their reported performance by the project team. Project managers have......

Words: 818 - Pages: 4

Premium Essay

Home Bias

...Home bias is one of the issues that have been identified based on this case study. Home bias is defined as the preference of the investor invests the equity mainly in domestic market rather than invest in the foreign market even though they can gain substantial benefit due to international diversification. The term of “equity home bias puzzle” is referring to the concept of holding extremely large proportion of domestic equity compare to foreign equity. This phenomenon also exists in other countries, which the investor seems to ignore the opportunity of investing in foreign equity and focus on local market. This statement can be further support by French and Poterba (1991) which states that approximately 94% of the funds are allocated to domestic security market, although the equity market in US only added up to less than 48% of global equity market as a whole. Therefore, extensive amount of studies have been conducted in order to identify the driving force behind the home bias. Based on the findings of the empirical studies, it reveals that the determinant of home bias can be conclude as high transaction cost and information asymmetric. One of the factor the cause the arisen of home bias is due to the high transaction cost. Transaction costs have been appeared in a few research papers but most of them have been ended with different conclusion. The research conducted by Domowitz, Glen, and Madhavan (1998) have classified the transaction cost into three components that is......

Words: 1132 - Pages: 5

Premium Essay

The Impact of Project Portfolio Management on Information Technology Projects

...The Impact of Project Portfolio Management on Information Technology Projects Sergio Ricardo Calderini London Business School Regent’s Park, London NW1 4SA, United Kingdom e-mail: scalderini.mba2004@london.edu Bert De Reyck London Business School Regent’s Park, London NW1 4SA, United Kingdom Tel. +44 20 7706 6884; Fax. +44 20 7724 7875; e-mail: bdereyck@london.edu Yael Grushka-Cockayne London Business School Regent’s Park, London NW1 4SA, United Kingdom Tel. +44 20 7262 5050; Fax. +44 20 7724 7875; e-mail: ygrushka.phd2003@london.edu Martin Lockett Ashridge Berkhamsted, Hertfordshire, HP4 1NS, United Kingdom Tel. +44 1442 841025; e-mail: martin@mlockett.com Marcio Moura London Business School Regent’s Park, London NW1 4SA, United Kingdom e-mail: mmoura.mba2004@london.edu Andrew Sloper CVC The Customer Value Company 48 St Mary's Road, Long Ditton, Surrey KT6 5EY, United Kingdom Tel. +44 7768 861920; e-mail: andrew.sloper@customervalue.co.uk  February 2005  Ashridge Business School UK - http://www.ashridge.org.uk The Impact of Project Portfolio Management on Information Technology Projects Abstract The ever-increasing penetration of projects as a way to organise work in many organisations necessitates effective management of multiple projects. This has resulted in a greater interest in the processes of project portfolio management (PPM), with more and more software tools being developed to assist and automate the process....

Words: 8228 - Pages: 33

Premium Essay

Accounting Information for Managers to Make Better Decisions

...Accounting Information for Managers To Make Better Decisions 1 Abstract This paper analysis how the accounting information would support the decision making process. The main goal of an accounting system is to provide financial information about the organization including financial situation and the performance of the organization. The decision makers should know the situation of the organization either by comparing competitors or previous periods’ performance in order to achieve the objectives of the company and this being possible by using accounting information. In addition, this thesis studies the importance of having effective and efficient accounting system to make better decision as it relates to increase the profitability target of an organization. Organizations should replace their weak accounting system in order to ensure that each team member in the Accounts Department is conscious of their role to produce good accounting information (1, Okoli Margaret). The result of this paper describes that providing right information to the right people in time via management reporting to maximize the use of reports in decision-making. 2 Introduction Any organization should survive and excel in the fast paced and ever changing market. We are living in the digital era so information can be found everywhere via websites, databases documents, reports, and emails. However, it’s important to read the historical data-set during decision making process but providing report in......

Words: 2005 - Pages: 9

Premium Essay

Information Security for Managers

... Information Security for Managers Submitted By: Student Number: Submitted Date: January 22, 2009 Table of Contents 1. Information Security Policy (Word Count = approx. 1000) 3 1.1 Security: 3 1.2 Policy: 3 1.3 Information Security Policy and its importance: 4 1.4 Policies, Procedures, Practices, Guidelines 5 1.5 Example of good policy statement 6 1.6 Possible structure of information security policy documents 7 1.7 Strategies and techniques to implement information security policies 8 2. Developing the Security Program(Word Count = approx. 500) 9 3. Security Management Models and Practices (Word Count = approx. 500) 11 A. ISO/IEC Model 11 B. NIST Security Model 11 C. RFC 2196 11 D. COBIT 11 E. COSO 12 4. List of References: 13 1. Information Security Policy 1.1 Security: Security has been a real issue for this century. Due to the new emerging technology like RFID and wireless devices there have been various issues regarding privacy and security of person and an enterprise. Security can be understood as a condition to protect against unauthorized access. In terms of IT, security can be categorized into application security, computing security, data security, information security, and network security. Source: (Whitman & Mattord 2007, p.5) Even though all of these security fields need to be monitored in an enterprise, for instance in this document we are concerned only with information security. Information......

Words: 2401 - Pages: 10