Mutual Fund Skills and the Performance of Corporate Acquirers
48 Pages Posted: 14 Mar 2012
Date Written: February 12, 2012
Existing corporate governance research interprets positive correlation between institutional ownership and the success of mergers as evidence of active monitoring by institutional investors. The possibility that some institutional investors may have merely picked stocks that make better acquisitions is acknowledged but not investigated. This study examines stock picking on acquirers by actively managed equity mutual funds. Using different proxies for fund skills, we show that acquirers held by the most skilled funds just prior to an acquisition experience significantly better stock performance and operating performance after the merger. In the year preceding the acquisition announcement, higher-skill funds increase their holdings of the most successful acquirers and decrease their holdings of least successful acquirers. Moreover, using Active Share as a proxy for stock picking, we show that more active funds decrease holdings in all acquirers, but the decrease is largest for the least successful acquirers. The link between fund skill and post-merger performance of portfolio companies is not attributable to better monitoring by high-skill funds. Overall, these results provide strong evidence that skilled mutual funds pick the stocks of firms that subsequently make better acquisitions.
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