Mutual Fund Preference for Pure-Play Firms


Speaker: Dr. Mark H. Liu

Time: 10:00-11:30, Thursday  Dec. 21, 2017


We find that actively managed mutual funds have a preference for pure-play firms over conglomerates, measured by the fraction of shares outstanding held by these funds. We test two competing hypotheses. The information asymmetry hypothesis posits that mutual funds are better at producing and processing information than other investors, hence they prefer pure-plays firms because of greater information asymmetry. The industry expertise hypothesis posits that mutual funds are industry experts. By holding pure-play firms, they can invest 100% of their money in the industry in which they have expertise, whereas investing in conglomerates will dilute their investments. Evidence supports the industry expertise hypothesis: Mutual funds prefer stocks of firms that operate in fewer industries and firms with greater industry beta; further, our results are more pronounced among mutual funds with greater industry expertise. After conglomerating mergers and acquisitions (M&As), mutual fund ownership decreases, especially if the degree of sales concentration across segments drops after the M&As.