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Learning by Doing: The Value of Experience and the Origins of Skill for Mutual Fund Managers

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Abstract

Learning by doing matters for professional investors. We develop a new methodology to show that mutual fund managers outperform by a risk-adjusted 1.5% per quarter in industries where they have experience. The key to our identification strategy is that we look "inside" funds and exploit heterogeneity in experience for the same manager at a given point in time across industries. As fund managers become more experienced, their trades become better predictors for abnormal stock returns around subsequent earnings announcements. Our approach identifies experience as a first-order driver of observed mutual fund manager skill.

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... TAP briefings or sessions addressing VA benefits, employment, and resilient transitions, which compose major portions of this program, continue to be provided using mostly outdated didactic teaching approaches that rely heavily on Microsoft PowerPoint presentations. These briefings rarely employ more current learning approaches such as experiential learning techniques, computer-assisted instruction, or simulation-based instruction which have been found to improve student participation, retention, and application of course material (Fletcher, 2009;Kempf, Manconi, & Spalt, 2017;Menaker, Coleman, Collins, & Murawski, 2005;Reime, et al., 2017). ...
... Training is provided using experiential, computer-assisted, and simulation-based instruction techniques which challenge participants to learn, practice, and apply valuable information needed for their post-military lives. (Fletcher, 2009;Kempf et al., 2017;Menaker et al., 2005;Reime et al., 2017) These learning approaches which require the learner to interact, manipulate, and sometimes modify the course learning material to solve problems or address needs, have been found to effectively foster information retention by participants participant information retention in military, business, medical, and social service educational programs (Fletcher, 2009;Kempf et al., 2017;Menaker et al., 2005;Reime et al., 2017). ...
... Training is provided using experiential, computer-assisted, and simulation-based instruction techniques which challenge participants to learn, practice, and apply valuable information needed for their post-military lives. (Fletcher, 2009;Kempf et al., 2017;Menaker et al., 2005;Reime et al., 2017) These learning approaches which require the learner to interact, manipulate, and sometimes modify the course learning material to solve problems or address needs, have been found to effectively foster information retention by participants participant information retention in military, business, medical, and social service educational programs (Fletcher, 2009;Kempf et al., 2017;Menaker et al., 2005;Reime et al., 2017). ...
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... Hence, we propose the following hypotheses: Moreover, on-the-job experience is an essential source of knowledge. When similar situations arise, the experience can provide helpful knowledge to predict an outcome, reduce risk, avoid failure, and ensure increased performance (Kempf et al., 2014;Pástor et al., 2015). Additionally, experienced directors can manage business issues more effectively and direct others to achieve organisational goals with integrity (Haynes & Hillman, 2010). ...
... Furthermore, the results of this study show that the average experience of directors has a positive and significant impact on FP; thus, hypothesis H 15 is accepted (β = 0.159, t-value = 4.00). Kempf et al. (2014) reported similar results. Directors with more experience gain more expertise in businesses, markets, and competition. ...
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This study aimed to investigate the mediating role of innovation between corporate governance and firm performance. The theoretical foundations of this study were the agency and resource dependence theories. The data were collected from annual reports of non-financial firms listed on the Pakistan Stock Exchange and spanned the period from 2010 to 2019. The direct impact of corporate governance was evaluated using Driscoll Kraay’s standard errors, while for the mediating role of innovation, each indirect impact was separately examined using the bootstrapping technique in Stata. Interestingly, the study found significant support for a direct impact of corporate governance variables on firm performance, except for independent directors. The indirect impact of corporate governance on firm performance was also appraised, except for directors’ interlocks and family ownership. Based on the findings, the study suggests that firms can achieve higher performance by effectively using embedded resources from the corporate governance structure and innovation.
... The effect of work experience on productivity has been extensively studied in the economics of human capital (Mincer, 1974;Becker, 1975;Neal, 1995). Finance literature has found that the investment performance of mutual fund managers is related to their characteristics, such as age, educational level, undergraduate GPA (Golec, 1996;Chevalier & Ellison, 1999a;Greenwood & Nagel, 2009;Li et al., 2011), and past work experience (Kempf et al., 2017;Cici et al., 2018;Chen et al., 2018). Cici et al. (2018) show that mutual fund managers exploit the information advantage they acquired in other industries before joining fund management and then allocate a disproportional amount of stocks from industries where they have experience. ...
... The investment skills of fund managers are also related to their past work experience. Industry-specific job experience is the first-order driver of the observed skills of mutual fund managers (Kempf et al., 2017). Similarly, Chen et al. (2018) find that managers who worked as industry analysts exhibit superior stock-picking skills, while managers who were macroeconomic analysts previously have strong market-timing abilities. ...
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We evaluate how work experience in mutual funds affects manager skills after they switch to private funds. Using a proprietary Chinese private fund database from 2012 to 2016, we document that, despite their work experience in mutual funds, switched private fund managers significantly underperform compared with their peer managers in private funds. In particular, the investment skills of smart managers with superior track records in mutual funds deteriorate after the career switch. Moreover, the reduction in skills of smart managers is mainly attributable to the loss of corporate research support in private funds. Our findings demonstrate that the skill sets of mutual fund managers are hardly transferable to the private fund industry.
... Kacperczyk, Sialm, and Zheng (2005) show that mutual fund managers who have concentrated positions in a few industries achieve positive abnormal returns. Kempf, Manconi, and Spalt (2014) report that mutual fund managers outperform in industries in which they have more investing experience. Finally, Cici, Gehde-Trapp, Göricke, and Kempf (2014) find that mutual fund managers do not overweight industries in which they previously worked. ...
... Kacperczyk, Sialm, and Zheng (2005), Kempf, Manconi, and Spalt (2014), and Cici, Gehde-Trapp, ...
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We study whether industry familiarity is an advantage in stock trading by exploring the trading patterns of industry insiders in their own personal portfolios. To do so, we identify accounts of industry insiders in a large data set provided by a retail discount broker. We find that insiders trade firms from their own industry more frequently. Furthermore, they earn abnormal returns exclusively when trading own-industry stocks, especially obscure stocks (small, low analyst coverage, high volatility). In a battery of tests, we find no evidence of the use of private information. The results are most consistent with the interpretation that industry familiarity is an advantage in stock trading.
... An emerging stream of literature examines the effect of cross (or common) ownership (i.e., ownership of two firms often within the same industry by a common owner) on various corporate behavior. The literature shows that crossownership has a meaningful impact on corporate behavior, including product market competition and coordination (He and Huang 2017;Azar et al. 2018;He, Li, and Yeung 2020), monitoring efficiency (Ramalingegowda, Utke, and Yu 2021), mergers and acquisitions (Matvos and Ostrovsky 2008;Harford, Jenter, and Li 2011), shareholder voting and governance (Kempf, Manconi, and Spalt 2017;He, Huang, and Zhao 2019), executive compensation (Ant on, Ederer, Gin e, and Schmalz 2023), and voluntary disclosure practices (Park et al. 2019). These studies suggest that, in debt contracting settings, borrower-lender cross-owners might be in a unique position to influence the contracting process. ...
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... The following section reviews earlier studies on the impact of corporate governance and other pertinent factors on the financial performance of pension funds. Despite various researches on the factors influencing the performance of pension funds, such as manager's gender (Alda, 2016), experience (Kempf et al., 2017), tenure (Clare et al., 2016), the level of specialisation of the administrators (Alda et al., 2017) or expenses (Broeders et al., 2019), there is limited information on the relationship between the related pension fund features and the financial performance of PFAs. The following factors are examined in the current study as being crucial predictors of PFAs' financial performance in Nigeria. ...
... Our first contribution is to the literature examining the effects of learning from experience. The majority of studies on investors' learning behavior focus on the stock market, finding that trading experience can improve investors' performance (Nicolosi et al. 2009;Seru et al. 2010;Kempf et al. 2017;Lunawat 2021) and reduce the behavioral bias of the disposition effect (Feng and Seasholes 2005;Dhar and Zhu 2006;Da Costa et al. 2013;Meng and Weng 2018). Moreover, they find that investors are more likely to participate in IPOs after good returns from past IPOs (Kaustia and Knupfer 2008;Chiang et al. 2011;Anagol et al. 2021). ...
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... Crossan and Bapuji (2003) defend that the traditional measurement of learning is related to the so-called curves of learning and experience in which the ability of institutions to learn is a function of time and call it internal learning. Similarly, Offerman and Sonnemans (1998) and Kempf et al. (2017) focus on the importance of the concept of learning-by-doing in professional investors and show that experience is associated with better management abilities. Weick and Ashford (2001) note that learning from past errors is important for individuals, groups, and organizations as part of the theoretical framework of learning from experience (Argyris 1993;Argote 1999). ...
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... As stated in the seminal work of Arrow (1962), "learning can only take place through the attempt to solve a problem". Kempf et al. (2017) propose that managers who experience industry shocks learn more than those who do not for a period of time. In our study, the liquidation of a manager's previous fund is essentially the "problem" as in Arrow (1962). ...
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... Learning offers a second potential explanation, where those with the worst performance improve with experience. Kempf et al. (2014) , for example, find that learning-by-doing occurs even among mutual fund managers investing in public equities, and in venture capital, Sørensen (2007) finds positive associations between investing experience and the rates at which portfolio companies had successful exits. ...
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... 5 In fact, they show scale effects and heterogeneity in risk preferences cannot explain the whole cross section of returns across households. Moreover, they find the individual fixed effects (after controlling for the observed risk-taking behavior), interpreted as sophistication, substantially increases the explanatory power 6 Further on the role of experience, Kempf, Manconi, and Spalt (2017) show fund managers' performance in a sector increases with his or her investment experience in that sector. ...
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I examine how differences in the ability to identify profitable investment opportunities contribute to wealth inequality. I analyze a model of financial markets with investors heterogeneously informed about future returns. The unconditional wealth share distribution features a thick right-tail populated by the best-informed investors. Wealth inequality increases with the cost of information acquisition and market liquidity. It is non-monotone in the precision of public information and the size of investments delegated to the best-informed investors. I provide bounds for the speed of wealth dynamics. Using data on US households' beliefs, the model can explain the recent dynamics in wealth inequality.
... In line with this argument, Wu, Wermers, and Zechner (2013) find that investors do not respond to the underperformance of longer tenured managers even in the context of closed-end funds, which, according to law, may not be distributed publicly (SEC Staff Report (2003)). Kempf, Manconi and Spalt (2013) find that performance is higher when managers have more experience in the industries in which the fund is investing compared to less experienced managers; Adam and Guettler (2014) reveal that funds with more experience using CDS perform better during the 2007-2009 financial crisis than funds with less experience. Furthermore, following the Berk andGreen (2004) model, Wu, Wermers, andZechner (2013) find that managers who generate high shareholder surplus (using fund premium as a proxy in the case of closed-end funds) capture rents on their professional skills by expanding the amount of assets under the control of management across several funds and increasing management fees, which are part of the expense ratio. ...
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