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Mutual fund performance and board characteristics relating to manager terminations.
Subject:
Managers (Compensation and benefits)
Mutual fund industry (Compensation and benefits)
Author:
Nenninger, Steve A.
Pub Date:
07/01/2011
Publication:
Name: Academy of Accounting and Financial Studies Journal Publisher: The DreamCatchers Group, LLC Audience: Academic Format: Magazine/Journal Subject: Business Copyright: COPYRIGHT 2011 The DreamCatchers Group, LLC ISSN: 1096-3685
Issue:
Date: July, 2011 Source Volume: 15 Source Issue: 3
Topic:
Event Code: 280 Personnel administration
Product:
SIC Code: 6221 Commodity contracts brokers, dealers; 6722 Management investment, open-end; 6726 Investment offices, not elsewhere classified
Geographic:
Geographic Scope: United States Geographic Code: 1USA United States

Accession Number:
263035497
Full Text:
This study examines mutual fund performance around fund manager replacement and the timing of the decision to replace mutual fund managers. Fund manager replacement timing is explored to test whether quick actions by boards of directors mitigate the negative fund performance characteristics usually associated with manager replacement. The study includes data from 507 instances of replacement of an individual fund manager or the entire management team. While results match previous findings that returns improve and standard deviation falls following a manager change, several important new findings are also presented. In using a unique control sample of funds matched on prior period performance, net assets, and investment objective, it is shown that poorly performing managers who retain their positions actually improve fund performance to as great a degree as the new managers hired after a termination. Both groups experience improved returns and lower standard deviation of monthly return after the replacement date.

Further, evidence indicates that for boards which decide to replace poorly performing managers, stronger boards are more likely to complete the replacement early in a period of underperformance. That is, boards which have a larger percentage of independent directors and which are smaller tend to be associated with early terminations.

INTRODUCTION

Mutual funds experiencing poor performance often replace the fund manager in an effort to improve returns. Managers who are underperforming are therefore motivated to increase performance in order to retain their position. While this may initially appear to align managers' goals with those of shareholders, a deeper examination is required. Fund managers who are underperforming may feel a need to focus exclusively on short-term results, and therefore increase risk in a gamble to boost returns (Chevalier and Ellison (1997), Brown, Harlow, and Starks (1996)). If the gamble pays off, the manager may keep his position, while if the gamble fails, he only loses a position which he was destined to lose anyway. An underperforming manager who remains in place for several years may compound the severity of the problem, resulting in a trend of increasing risk, lower performance, and lower asset flows.

Prior research has shown that performance and flows generally increase and risk decreases following a manager replacement (Chevalier and Ellison (1999), Khorana (1996) Khorana (2001)). The improvement is usually credited to the new manager. However, in this paper I compare funds which have changed managers to a matched set of funds which have not replaced managers in order to determine whether poorly performing funds which retain their managers also experience improved performance. This study is unique in determining a control group of funds with similar performance rather than comparing the "change" funds to a much broader control group based solely on investment objective. Therefore, the first question addressed in this paper is whether credit should be given the new manager or if there is a general mean reversion that occurs in underperforming funds over time.

Results indicate that after the manger replacement date, performance, asset flows, and risk are very similar for the funds which replaced their managers and the control group. Excess objective returns approach 0 for both groups in the post-replacement period, a significant increase from negative excess objective returns prior to the manager change. Flows, which appear to follow lagged return, fall during the pre-replacement period, then also increase after the replacement date.

Secondly, since prior studies have shown that a manager replacement is a positive event for a struggling fund, the timing of the decision to replace mutual fund managers is examined. I test whether more timely reactions by boards of directors mitigate the negative fund performance characteristics usually associated with manager replacement. I find no significant reaction of flows to an early manager change. Fund returns appear to be the more likely driver of flows, and flows improve with performance, regardless of the timing of the manager change. Finally, I test whether an early replacement decision is associated with stronger board governance characteristics. If directors assume that changing a manager can boost performance, then stronger boards may be more likely to replace a manager early. I find that boards of directors with a greater percentage of independent members, fewer members, and an older chair are associated with early manger changes.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

The relation of mutual fund flows to performance has been the focus of several studies. Chevalier and Ellison (1997) find that underperforming fund managers attempt to gamble by increasing risk in an effort to boost returns. A successful gamble may result in the manager retaining his position, while a loss may simply result in the manager losing the job he was likely to lose anyway. Further, Sirri and Tufano (1998) report that the sensitivity of flows to performance is high during superior performance, but low during under performance. Consumers base mutual fund investment decisions at least in part on past performance, putting more money into funds that perform very well in the prior period, but they do not divest of poor performers. If outflows are similar for under-performers regardless of the severity of poor returns, there appears to be little incentive for managers to avoid steeper losses in already underperforming funds. A poorly performing manager may increase risk in order to move up in rankings at the risk of damaging return even more.

Similar results are found by Brown, Harlow, and Starks (1996) who describe the mutual fund market as a tournament in which all funds compete for new assets based on relative performance. They report mid-year underperformers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid-year winners.

Given the reasons to replace the manager of a poorly performing fund, I next examine fund performance around a manager change. Chevalier and Ellison (1999) find that firing a manager who has performed poorly may reduce outflows by 45% compared to a control group. Khorana (1996) provides additional evidence of improvement after manager replacement. He finds that departing managers tend to have higher fund turnover and higher expenses. Growth is also much slower for funds before a manager replacement compared to a control group, and risk increases as termination approaches. This market reaction of investors provides support for the replacement of poorly performing managers as soon as they are identified.

In a later study, Khorana (2001) finds that after a manager replacement, underperforming funds experience significant improvement in returns relative to past performance, and that changes are preceded by decreasing net flows. Underperforming fund risk is higher pre-replacement, then declines. In a study of Australian equity mergers from 1994 to 2000, Gallagher, Nadarajay, and Pinnuck (2006) find that after replacement, poorly performing funds improve performance, but not because of better stock selection. Performance is enhanced primarily through decreased momentum investment strategies and decreased portfolio concentration.

If performance is affected by the replacement of the fund manager, then the timing of the replacement may also be important. While the timing of mutual fund manager replacement has not been previously examined, Ertugrul and Krishnan (2007) study the timing of CEO dismissal, and find that late CEO terminations result in worse ex-post performance, more bankruptcies, and more de-listings than do early replacements. Stock market reactions are negative for early replacement, while there is no reaction to late, suggesting that the market has already adjusted for poor performance of the CEO in office longer. They also find that more effective boards replace lagging CEOs earlier, before stock performance suffers. Less effective boards rely on a history of poor performance rather than internal indications of potential declines in management ability.

Mutual fund governing bodies are similar to corporate boards of directors. Mutual fund governance consists of a board of directors (trustees) who are elected by shareholders (fund owners) and have specific responsibilities, including employing the fund advisor. The fund advisor controls the management of the fund and hires the fund manager, who is responsible for investment decisions.

There have been few studies into the effectiveness of mutual fund boards. Khorana, Tufano, and Wedge (2007) find that fund mergers are more likely when the board is composed of a higher percentage of independent directors, and mergers are less likely when relatively higher paid boards govern the merger target. Tufano and Sevick (1997) find that shareholder fees are lower when boards are smaller and have a greater fraction of independent directors. They also find some evidence of better paid directors setting higher fund fees.

I first examine performance around a fund manager change. Manager replacements are classified as either forced or voluntary, where forced replacements are those instances in which a fund manager leaves a fund and is not reported as a manager of a fund with greater assets within two years. Further, since a main reason for increased performance after a manager change may be prior-period underperformance, I also test post-turnover performance to a matched sample of funds without a manager change. The control sample is matched based on investment objective, excess objective returns prior to the replacement date, and net assets.

H1: Following a forced turnover a fund will demonstrate: 1) increased performance, 2) reduced risk, and 3) increased net flows.

I next examine the timing of the replacement decision. If fund directors can determine at an early stage that performance is deteriorating or that other factors indicate a fund manager needs to be replaced, they will attempt to replace the manager as early as the decision can be correctly made. The sample of forced turnovers is divided into two additional subsets: those which replace early and those which replace late. I calculate the mean number of months during the two years prior to the manager change that the sample funds posted negative excess objective returns. Those replacements which are preceded by more than the mean are classified as late. Early replacements include those with the same or a fewer number of months of negative return.

H2: Post replacement performance, risk, and net flows are different for late and early replacements.

Finally, it has been shown in corporate finance that certain board characteristics are associated with "better" boards. I test this for mutual fund boards, and expect that boards which are smaller, more independent, and have an independent chair will be associated with a greater likelihood of early replacement.

H3: The probability of an early termination increases with stronger board governance characteristics.

An overview of the relation of the hypotheses is shown in figure 1.

[FIGURE 1 OMITTED]

SAMPLE AND METHODOLOGY

To construct the sample, I examine the CRSP mutual fund database to identify all changes of a sole manager or the replacement of an entire management team for domestic equity funds for the period of January 2002 through December 2005. To be included in the sample, a fund must have at least two years of pre- and post-turnover performance data and only one manager change during the sample period. The sample includes 507 funds meeting the selection criteria. The replacement date (t = 0) is set to the six month period during which CRSP reports the change in manager.

I compare this "change sample" to a matched control group. Fund matches are determined by using logistic regression, run separately for each period and for each investment category, to estimate the probability of manager replacement. The independent variables are return and net flow during the pre-replacement period. The match is the fund with an identical two-decimal probability of replacement with the asset size nearest the target fund. If a twodecimal match is not found, then the next closest probability is used. Each fund in the matched sample is used only once. For the control funds, the replacement date is set to the replacement date of their matched funds. Three areas of fund performance are examined: return, net flows, and risk. Risk is defined as the standard deviation of monthly returns for 12 month periods surrounding replacement. Return is measured using fund excess objective return. Objective return is determined by first dividing all domestic equity funds in CRSP into the seven CRSP classifications of large growth, aggressive growth, income and growth, growth and income, mid cap, small cap, and S&P index. The mean return for each category is calculated for each month. That mean is subtracted from the actual return for each fund within the category to result in the excess objective return, as shown below.

[EXCESS OBJECTIVE RETURN.sub.it] = ([R.sub.i,t])--([R.sub.o,t])

Where [R.sub.i,t] is the return of fund i for period t, and [R.sub.o,t] is the mean return of all funds with the same investment category for period t.

Net flow is defined as follows:

[PERCENT NETFLOW.sub.i,t] = [[ASSETS.sub.i,t]--[ASSETS.sub.i,t-1] * (1 + [R.sub.i,t])]/[ASSETS.sub.i,t-i] Where [ASSETS.sub.i,t] is total assets in fund i at the end of period t, and [R.sub.i,t] is the return of fund i during period t. PERCENT NETFLOW measures the growth in assets over and above the change in value of fund assets at the beginning of the period.

To test hypothesis 2, the sample is divided into early and late terminations as described earlier. I use the same methodology as in hypothesis 1 above, but here the sample is divided into the groups of early vs. late replacement rather than the sample vs. the control group. The reason for this is to examine the economic impact to a fund, if any, of allowing poorly performing fund managers to remain in charge longer.

To test hypothesis 3, I examine the board characteristics of the sample funds. While the board does not have direct control over the fund manager replacement decision (the fund advisor technically makes that decision), it is assumed that this is an important enough matter that the board would exude influence. Also, the culture or environment established by the board may dictate the actions taken in employing the manager. Data concerning the boards of directors are collected from the SEC for all the funds in the sample. This is published in forms 485APOA and 485BPOS, and is available on the SEC website at www.sec.gov.

I estimate the probability of early replacement using logistic regression and board governance characteristics in the model below:

P (early replacement) = f {board governance characteristics} Where board governance characteristics include:

* Board size: the number of directors on the board of the fund

* Compensation: the annual compensation earned by a board member from the fund

* Independent board: the percentage of the board composed of unaffiliated directors

* Independent chair: a dummy variable equal to one if the chair is unaffiliated with the fund

* Retirement: dummy variable equal to one if the board members receive pension benefits after retirement

* Director Age: the average age of fund board members

* Chair Age: age of the Board Chairman

RESULTS

Table 1 reports the excess objective return for each 6 month period surrounding the manager change, as well as the return for each full 24 month period before and after replacement. Both the control group and the sample exhibit poor performance before the manager change, as expected. Both groups also exhibit performance not significantly different from the mean of the fund objective after the replacement date, except for a return of -0.63% for the change group in the 6 to 12 moth period after the change. While one may expect a new manager to be able to improve performance, it appears that those managers who remained at their funds also improved performance--at least up to the mean for their fund objective. The only significant difference in performance between the funds which changed managers and those which didn't was in months 6 to 12 post-replacement, in which the funds with a change actually performed worse.

Panel B shows that the late change group is associated with lower performance before the change date. This is expected since by definition, late changes have more months of negative performance. Interestingly, the change group underperforms the control group for the first 12 months after the replacement, with manager change funds averaging excess objective returns lower than the control group by 1.02 and 1.11 percent each of the first two 6month periods. The only significant negative period post replacement date for the control group is for the 6 month period from 18 to 24 months after the change date. Performance for both groups is neither significantly different from 0, nor different from each other for the full 24 months post-replacement date period, indicating again that performance is no better for those funds which changed managers, even for these late changes which are preceded by longer periods or poor performance.

Panel C of Table 1 examines changes between early and late manager replacements. Performance prior to the manager change is not reported since it is much worse for late changes due to the method of classification. Those funds with an early manager change outperform those with a late change by 99 basis points for the first 6 months after the change date. Both groups are negative from months 6 to 12. Performance is similar for the next 12 months, then those funds which replaced the manager late outperform by 50 basis points, but the difference is only marginally significant. Also, performance over the full 24-month period is not significantly different for the two groups. This suggests that the timing of a manager change does not significantly impact post-replacement returns. The results reported in Table 1 are also shown graphically in Figure 2, which more clearly demonstrates the convergence to 0 of the excess objective return of both the replacement and control groups for all three categories of comparisons. Taken together, these results suggest there is not a significantly greater increase in fund performance for funds which replace a manager either early or late.

[FIGURE 2 OMITTED]

Table 2 Panel A shows that flows are not significantly different for the replacement group and the matched sample before replacement, and were generally falling and approaching 0 net flows by the time of replacement. Flows continue to fall after the replacement date for both groups, with the only significant difference in period 2 in which flows were 2.43 percentage points lower for those funds with a replacement. Flows for both groups are flat in the 12 month period surrounding replacements, so there appears to be no significant signal (either positive or negative) associated with a manager change.

Panel B reports the results for late changes. Flows prior to the change date are negative and declining for both groups, with no significant differences. After the change date, flows for periods 2 and 3 are significantly lower for the change group vs. the no change group by 3.08 and 3.69 percentage points, respectively. It appears that a manger change is a negative event for a fund, even when compared to funds with equally poor performance. A new manager does not appear to be a positive signal for a poorly performing fund. Flows are actually higher for poorly performing funds which retain their managers.

Panel C compares early and late manager changes. Flows are higher for the early changes for periods 2 and 3, which suggests that an early change can better stop the trend of decreasing cash flows. Also, since late replacement funds demonstrate lower flows prior to replacement as well, an early replacement may mitigate some of the negative flows associated with retaining a poorly performing manager longer.

The results reported in Table 2 are also shown graphically in Figure 3. As with returns, the flows for both groups are similar except for the early vs. late changes. It appears that the replacement of a manager who has a longer history of poor performance may actually cease the decline in flows during the six months after replacement, but only temporarily as the trend of decreasing flows then continues for the next 12 month period.

[FIGURE 3 OMITTED]

Table 3 reports changes in standard deviation. For the forced replacements in Panel A, the standard deviation of monthly returns is similar for both the sample and the control group. Each group also experiences lower standard deviation across time. This supports Chevalier and Ellison (1997) in that standard deviation declines, but I also find a decline for those funds which did not change their manager. Panel B shows very similar results for late replacements.

Panel C shows that standard deviation is slightly greater for the late changes for the period of return ending two years after the replacement. This may be the result of greater changes to the holding of the portfolio of late replacements. If a fund has performed poorly for a long period, more significant changes in holdings may be needed.

The results from the left half of Table 3 are also shown graphically in Figure 4, which more clearly shows the decreasing standard deviation around the replacement, as well as the very similar pattern for both the change and control groups.

[FIGURE 4 OMITTED]

While I have shown little incentive for replacing a poorly performing fund manager, prior research as well as intuition suggests that when portfolio performance is below average, the manager may be the problem. In this section, I examine mutual fund board characteristics, and test whether there is a connection between governance and the timing of the decision to replace a mutual fund manager.

I use only the sample of funds which experience a forced replacement, and compare the early changes to the late. Table 4 reports the results from the logistic regression used to test for relations between common board characteristics and the probability of a replacement being an early replacement. Chair age, the percentage of board members which are independent, and board size are all significant predictors of whether a change in fund manager will be an early change. Coefficients for chair age and percentage independent are positive and significant, indicating that the probably of a change being an early change are higher when the chair is older and the board is more independent. The negative coefficient for board size implies that early changes are more likely for smaller boards. Taken together, these results suggest that the board characteristics generally regarded as indicating stronger boards are associated with early replacement.

ROBUSTNESS CHECKS

A potential issue with the data is that the manager changes from CRSP are grouped over a six month window. That is, a manager change in January is reported with the same change date as one in June. To test whether this impacts the results, I collect manager tenure information from Morningstar, then manually calculate the change month. Of the 507 funds from CRSP, 340 were successfully matched against the Morningstar database.

Results related to returns and flows are reported in Tables 10 and 11, and are very similar to the patterns revealed using the full CRSP data. The returns and flows of the change sample and control group again appear to converge after the change date. This again implies no significant advantage to performance or asset flows in replacing a manager.

CONCLUSIONS

While results match previous findings that returns and flows improve and standard deviation is reduced following a manager change, several important new findings are also presented. Most past studies compare funds with a manager change to all other funds with the same investment category, without matching on performance. In using a unique control sample of funds matched on prior period performance, net assets, and investment objective, I have shown that poorly performing managers who retain their positions actually improve fund performance just as well as those funds in which the manager is replaced. Both groups experience improved returns and lower standard deviation of monthly return.

Regardless of the lack of evidence supporting improved performance due to manager replacement, I also find evidence that stronger boards are more likely to replace a manager early in a period of underperformance. Boards which have a larger percentage of independent directors and which are smaller tend to be associated with early replacements.

REFERENCES

Brown, K. W., V. Harlow, & L. Starks, (1996), Of tournament and temptations: An analysis of managerial incentives in the mutual fund industry. Journal of Finance 51, 85-110. Chevalier, J. & G. Ellison, (1997), Risk taking by mutual funds as a response to incentives. Journal of Political Economy 105, 1167-1203.

Chevalier, J. & G. Ellison, (1999) Career concerns of mutual fund managers. Quarterly Journal of Economics 114, 389432.

Ertugrul, M. & K. Krishnan, (2007), CEO dismissal timing and costs of delayed action: Do some boards act too late? working paper.

Gallagher, D., P. Nadarajay, & M. Pinnuck, (2006), Top management turnover: An examination of portfolio holding and fund performance. Australian Journal of Management 31, 265-292.

Khorana, A. (1996), Top management turnover, An empirical investigation into mutual fund managers. Journal of Financial Economics 40, 403-427.

Khorana, A., (2001), Performance changes following top management turnover: Evidence from open-end mutual funds. Journal of Financial and Quantitative Analysis 36, 371-393.

Khorana, A., P. Tufano, & Lei Wedge, (2007), Board structure, mergers, and shareholder wealth: A study of the mutual fund industry. Journal of Financial Economics 85, 571-598.

Sirri, E. & P. Tufano (1998), Costly search of mutual fund flows. Journal of Finance 53, 1589-1622.

Tufano, P., & M. Sevick (1997), Board structure and fee setting in the U.S. mutual fund industry. Journal of Financial Economics, 46, 321-355.

Steve A. Nenninger, Sam Houston State University
Table 1: Mean excess objective return before and after replacement

This table reports the mean excess objective return for six-month
periods surrounding manager replacement for the sample, the control
group, and reports differences between the groups.

Panel A: Forced Change, n=388

Period         -4 to -1        -4           -3           -2

Six months     Full 24        -18          -12           -6
ending          prior

no change      -0.0267      -0.0078      -0.0108      -0.0121
                0.019        0.145        0.002        0.000

change         -0.0549      -0.0211      -0.0229      -0.0166
                <.0001       <.0001       <.0001       <.0001

diff            0.0282       0.0133       0.0121       0.0045
                0.071        0.059        0.025        0.327

Period            -1           1            2

Six months        0            6            12
ending

no change      -0.0129      -0.0007       0.0013
                <.0001       0.769        0.607

change         -0.0107      -0.0012      -0.0063
                0.016        0.518        0.010

diff           -0.0020       0.0005       0.0076
                0.691        0.857        0.031

Period            3            4          1 to 4

Six months        18           24        Full 24
ending                                     post

no change      -0.0015      -0.0016      -0.0002
                0.456        0.392        0.964

change         -0.0003       0.0003      -0.0053
                0.916        0.854        0.271

diff           -0.0010      -0.0020       0.0051
                0.684        0.447        0.492

Panel B: Late Change, n = 169

Period         -4 to -1        -4           -3           -2

Six months     Full 24        -18          -12           -6
ending          prior

no change      -0.1175      -0.0378      -0.0317      -0.0417
                <.0001       <.0001       <.0001       <.0001

change         -0.1793      -0.0655      -0.0613      -0.0442
                <.0001       <.0001       <.0001       <.0001

diff            0.0618       0.0276       0.0296       0.0025
                0.002        0.012        0.000        0.747

Period            -1           1            2

Six months        0            6            12
ending

no change      -0.0322       0.0034       0.0059
                <.0001       0.335        0.126

change         -0.0385      -0.0068      -0.0052
                <.0001       0.009        0.074

diff            0.0063       0.0102       0.0111
                0.445        0.020        0.022

Period            3            4          1 to 4

Six months        18           24        Full 24
ending                                     post

no change      -0.0049      -0.0086      -0.0025
                0.148        0.002        0.772

change          0.0012       0.0034      -0.0072
                0.655        0.190        0.204

diff           -0.0060      -0.0120       0.0047
                0.159        0.002        0.649

Panel C: Early vs. Late Change, n = 220/169, changed managers only

Period         -4 to -1        -4           -3           -2

Six months     Full 24        -18          -12           -6
ending          prior

early

late

Diff

Period            -1           1            2

Six months        0            6            12
ending

early                        0.0031      -0.0072
                             0.229        0.052

late                        -0.0068      -0.0052
                             0.009        0.074

Diff                         0.0099      -0.0020
                             0.007        0.665

Period            3            4          1 to 4

Six months        18           24        Full 24
ending                                     post

early          -0.0014      -0.0021      -0.0039
                0.707        0.325        0.599

late            0.0012       0.0034      -0.0072
                0.655        0.190        0.204

Diff           -0.0030      -0.0050       0.0033
                0.570        0.098        0.719

Table 2: Asset flow return before and after replacement

This table reports the mean asset flows for six-month periods
surrounding manager replacement for the sample, the control group,
and reports differences between the groups.

Panel A: Forced Change, n=388

Period          -4 to -1        -4           -3           -2

Six months      Full 24        -18          -12           -6
ending           prior

no change        0.2987       0.0565       0.0491       0.0019
                 0.001        <.0001       0.001        0.846

change           0.1509       0.0359       0.0244      -0.0087
                 0.011        0.018        0.060        0.421

diff             0.1478       0.0206       0.0246       0.0106
                 0.155        0.303        0.203        0.467

Period             -1           1            2

Six months         0            6            12
ending

no change       -0.0162      -0.0014      -0.0239
                 0.168        0.938        0.019

change          -0.0107       0.0069      -0.0481
                 0.658        0.875        <.0001

diff            -0.0050      -0.0080       0.0243
                 0.838        0.861        0.060

Period             3            4          1 to 4

Six months         18           24        Full 24
ending                                      post

no change       -0.0464      -0.0112       0.0259
                 <.0001       0.461        0.789

change          -0.0469      -0.0252      -0.0781
                 <.0001       0.078        0.261

diff             0.0005       0.0139       0.1040
                 0.966        0.504        0.382

Panel B: Late Change, n = 169

Period          -4 to -1        -4           -3           -2

Six months      Full 24        -18          -12           -6
ending           prior

no change       -0.0065       0.0523      -0.0019      -0.0486
                 0.883        0.006        0.899        <.0001

change          -0.0661       0.0194      -0.0235      -0.0511
                 0.157        0.433        0.086        <.0001

diff             0.0597       0.0329       0.0216       0.0025
                 0.351        0.289         0.28        0.871

Period             -1           1            2

Six months         0            6            12
ending

no change       -0.0442      -0.0100      -0.0360
                 0.021        0.781        0.012

change          -0.0445       0.0093      -0.0668
                 0.049        0.916        <.0001

diff             0.0003      -0.0190       0.0308
                 0.991        0.839        0.096

Period             3            4          1 to 4

Six months         18           24        Full 24
ending                                      post

no change       -0.0464      -0.0004       0.0791
                 0.002        0.990        0.708

change          -0.0833      -0.0380      -0.1466
                 <.0001       0.090        0.275

diff             0.0369       0.0376       0.2257
                 0.049        0.308        0.367

Panel C: Early vs. Late Change, n = 220/169, changed managers only

Period          -4 to -1        -4           -3           -2

Six months      Full 24        -18          -12           -6
ending           prior

early

late

Diff

Period             -1           1            2

Six months         0            6            12
ending

early                         0.0050      -0.0338
                              0.897        0.002

late                          0.0093      -0.0668
                              0.916        <.0001

Diff                         -0.0040       0.0330
                              0.962        0.040

Period             3            4          1 to 4

Six months         18           24        Full 24
ending                                      post

early           -0.0189      -0.0154      -0.0255
                 0.096        0.409        0.703

late            -0.0833      -0.0380      -0.1466
                 <.0001       0.090        0.275

Diff             0.0644       0.0226       0.1211
                 <.0001       0.435        0.419

Table 3: Changes among periods in standard deviation of monthly
return before and after replacement

This table reports the mean standard deviation of monthly return for
twelve-month periods surrounding manager replacement for the sample,
the control group, and reports differences between the groups. Also
reported are the differences in mean standard deviation between
consecutive six-month periods after manager replacement, as well as
differences in periods surrounding replacement.

Panel A: Forced Replacement, n = 388

                        Annual Standard Deviation of Monthly Return

Periods                -4,-3        -2,-1         1,2          3,4

12 months ending        -12           0            12           24

no change              0.0631       0.0516       0.037        0.0306
                       <.0001       <.0001       <.0001       <.0001

change                 0.0636       0.054        0.0362       0.0297
                       <.0001       <.0001       <.0001       <.0001

diff                  -0.0005      -0.002        0.0008       0.0009
                       0.823        0.298        0.575        0.297

Panel B: Late Replacement , n = 169

Periods                -4,-3        -2,-1         1,2          3,4

12 months ending        -12           0            12           24

No change              0.0709       0.0581       0.0398       0.0331
                       <.0001       <.0001       <.0001       <.0001

Change                 0.0725       0.0595       0.0365       0.0316
                       <.0001       <.0001       <.0001       <.0001

Diff                  -0.002       -0.001        0.0033       0.0014
                       0.732        0.732        0.199        0.332

Panel C: Early vs. Late Change, n = 220/169, changed managers only

Periods                -4,-3        -2,-1         1,2          3,4

12 months ending        -12           0            12           24

early                                            0.0359       0.0283
                                                 <.0001       <.0001

late                                             0.0365       0.0316
                                                 <.0001       <.0001

Diff                                            -0.0006      -0.003
                                                 0.769        0.003

Table 4: Probability of a change being an early change

This table reports the results of a logistic regression testing the
effect of board governance variables on the probability of a manager
change being an early change.

P (early replacement) = f {board governance characteristics}

                            Odds Ratio    Coefficient       P
                              Point
                             Estimate

Chair age                     1.024          0.0237       0.052
Percentage independent         1.02          0.0199       0.08
Size of board                 0.855         -0.1565         0
Average age                   0.992         -0.0081       0.802
Total Compensation            0.999         -0.0006       0.732
Independent chair dummy       0.974         -0.0268       0.918
N                              446

Table 5: Mean excess objective return before and after replacement--
Morningstar Change Dates

This table reports the mean excess objective return for six-month
periods surrounding manager replacement for the sample, the control
group, and reports differences between the groups. The change date
used for this table is collected from Morningstar.

Panel A: Forced Change, n=340

Period                   -4         -3         -2         -1

Six months ending       -18        -12         -6         0

no change             -0.0131    -0.0152    -0.0051    -0.0176
                       0.071      0.005      0.897      <.0001

change                -0.0222    -0.0148    -0.0113    -0.0164
                       <.0001     0.001        0        <.0001

diff                   0.0091    -0.0004     0.0118     -0.001
                       0.315      0.954      0.015      0.828

Period                   1          2          3          4

Six months ending        6          12         18         24

no change              0.0014     0.0001    -0.0029    -0.0011
                       0.648      0.982      0.244      0.643

change                 0.003     -0.0043     0.0013    -0.0021
                       0.27       0.024      0.468      0.229

diff                  -0.002      0.0044    -0.004      0.001
                       0.705      0.166      0.171      0.723

Panel B: Late Change, n = 154

Period                   -4         -3         -2         -1

Six months ending       -18        -12         -6         0

no change             -0.0404    -0.0395    -0.0123    -0.0373
                       0.001      <.0001     0.282      <.0001

change                -0.0611    -0.0488     -0.03     -0.0366
                       <.0001     <.0001     <.0001     <.0001

diff                   0.0207     0.0093     0.0245    -0.0007
                       0.167      0.332        0         0.93

Period                   1          2          3          4

Six months ending        6          12         18         24

no change              0.0014     0.01      -0.0068    -0.0082
                       0.728      0.006      0.058      0.006

change                -0.0069    -0.0079    -0.0005    -0.0076
                       0.039      0.001      0.822      0.004

diff                   0.0083     0.0178    -0.006     -0.0006
                       0.111      <.0001     0.138      0.881

Table 6: Asset flow return before and after replacement--using
Morningstar change dates

This table reports the mean net asset flows for six-month periods
surrounding manager replacement for the sample, the control group,
and reports differences between the groups. The change date used for
this table is collected from Morningstar.

Panel A: Forced Change, n=340

Period                   -4         -3         -2         -1

Six months ending       -18        -12         -6         0

no change              0.1279     0.0566     0.0426    -0.1121
                       <.0001       0        0.028      0.296

change                 0.0774     0.0401     0.0491    -0.0111
                       0.002      0.004      0.085      0.5

diff                   0.0505     0.0165    -0.007      0.087
                       0.157      0.42       0.85       0.352

Panel B: Late Change, n = 154

Period                   -4         -3         -2         -1

Six months ending       -18        -12         -6         0

no change              0.2663     0.0588     0.0108    -0.0344
                       0.107      0.08       0.68       0.2

change                 0.0315    -0.0199    -0.0379    -0.0582
                       0.18       0.151      0.001      <.0001

diff                   0.2348     0.0787     0.0487     0.0238
                       0.155      0.03       0.088      0.399

Period                   1          2          3          4

Six months ending        6          12         18         24

no change             -0.0545    -0.0365    -0.0443    -0.0219
                       <.0001     0.002      <.0001     0.3

change                -0.0748    -0.0477    -0.0629    -0.0491
                       <.0001       0        <.0001     <.0001

diff                   0.0561     0.0112     0.0186     0.0272
                       0.242      0.509      0.187      0.252

Panel B: Late Change, n = 154

Period                   1          2          3          4

Six months ending        6          12         18         24

no change             -0.0754    -0.045     -0.0465    -0.0052
                       <.0001     0.007      0.002      0.878

change                -0.0865    -0.0678    -0.0904    -0.066
                       <.0001     <.0001     <.0001       0

diff                   0.0111     0.0228     0.0439     0.0608
                       0.57       0.274      0.021      0.113
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