Joseph Farizo

University of Kentucky

Louisiana State University

Louisiana State University

(Black)Rock the Vote: Index Funds and Opposition to Management

I show index funds are more likely to oppose management on contentious management sponsored proposals at firms held only by their family’s index funds than on proposals at firms co-held by their family’s active funds. Additionally, shareholder proposals garner a greater level of support by index funds when the firm’s shares are not simultaneously held by a fund’s same-family active funds. Consistent with “locked-in” motives to monitor, these results imply index funds participate as more engaged voters when same-family active funds avoid holding positions in a firm.

Presented at SEC PhD Consortium (2018), Eastern Finance Association (2019), University of Kentucky (2019), FMA PhD Student Consortium (2019), FMA Annual Meeting (2019), University of South Carolina (2019), The College of New Jersey (2019), Salisbury University (2019), Towson University (2019), University of Richmond (2019), The Citadel (2019).

Misconduct and Fraud by Investment Managers

We document the prevalence and variety of frauds committed by investment managers. We show that prior legal and regulatory violations, conflicts-of-interest, and monitoring disclosures available via the Security and Exchange Commission’s Form ADV are useful for predicting fraud. Additional tests show that fraud by rogue employees is more predictable than firm-wide fraud, but both types of fraud are significantly predictable. We revisit the fraud prediction model of Dimmock and Gerken (2012) and test its performance out-of-sample (using fraud cases discovered since that article’s publication). We find the model has significant predictive power for the out-of-sample cases. To encourage additional research in this area, we have made the data used in this chapter publicly available at https://doi.org/10.13023/nsjd-rk62.

Following Dimmock and Gerken (2012) and Dimmock, Gerken, and Marietta-Westberg (2015), we use Form ADV data to construct an annual panel of registered investment advisors. Variable definitions are available at the data download site. If you use this dataset, please cite Dimmock, Farizo, and Gerken (2018) and Dimmock and Gerken (2012).

The Low-Risk Effect in Equities: Evidence from Industry Data in an Earlier Time

Recently, there has been discussion of a "replication crisis" in Finance, where many empirical results in financial research are said not to be replicable. Previous research finds that low-risk stocks have higher returns than higher-risk stocks on a risk-adjusted basis. We reexamine the low-risk effect using a unique dataset for U.S. industries from 1871 to 1925. We confirm the presence of the effect for portfolios of U.S. industries, indicating that the low-risk effect is not due to data mining in previous studies. Comparing the results to that for more recent data, we find that the overall effect is at least as strong in the earlier data. Given that some market frictions were fewer in the earlier period, the results suggest that implicit trading costs, illiquidity, and/or behavioral biases may play an important role in the low-risk effect.

Where is the Intersection of Madison Avenue and Wall Street? Advertisement, Local Access to Investment Advice, and Stock Market Participation

We examine the effects of advertisement by investment advisory firms on household stock market participation. Exploiting variation in exposure to financial advertising for households along designated market area (DMA) borders, we find evidence that increased advertising by investment advisory firms leads to higher stock market participation. Importantly, the effects are concentrated in counties where the advertising firm has a physical presence. Consistent with fixed cost frictions to participation, these effects are predominantly among higher income households. We also find larger effects in counties with higher income and racial diversity —areas that are likely to have lower trust. Our results highlight the complementary nature of persuasive advertising and local access to finance for building trust in the market for investment advice.

Presentations: University of Kentucky, FINRA Investor Education Foundation, FINRA's Office of the Chief Economist, and NORC at the University of Chicago Joint Conference on Diversity, Equity and Inclusion Issues in Capital Markets, 2021 CFP Academic Research Colloquium for Financial Planning and Related Disciplines poster session, 2022 Boulder Summer Conference on Consumer Financial Decision Making poster session, 2022 FMA Annual Meeting, University of Richmond, 2022 SFA Annual Meeting.

Endowment Asset Allocations: Insights and Strategies

Using monthly data from 1997 to 2023, we construct mean-variance optimized portfolios of common university endowment asset classes, including domestic equity, international equity, global bonds, hedge funds, private equity, real estate, and natural resources. We find substantial variation in optimal allocations to these asset classes across subperiods. Some asset classes are substantially more persistent in receiving allocations than others, while some asset classes rarely receive sizable allocations at all. Our results highlight the relevance of asset allocation in portfolio performance and may inform future decisions by institutional investors and endowment portfolio managers.