Luke Taylor

• Lubos Pastor, Robert F. Stambaugh, Luke Taylor (Working), Green Tilts. Abstract

  We estimate financial institutions’ portfolio tilts that relate to stocks’ environmental,
  social, and governance (ESG) characteristics. We find ESG-related
  tilts totaling 6% of the investment industry’s assets under management in 2021.
  ESG tilts are significant at both the extensive margin (which stocks are held)
  and the intensive margin (weights on stocks held). The latter tilts are larger.
  Institutions divest from brown stocks more by reducing positions than by eliminating
  them. The industry tilts increasingly toward green stocks, due to only the
  largest institutions. Other institutions and households tilt increasingly toward
  brown stocks. UNPRI signatories tilt greener; banks tilt browner.

• Lubos Pastor, Robert F. Stambaugh, Luke Taylor (2022), Dissecting Green Returns, Journal of Financial Economics, 146 (), pp. 403-424. Abstract

  Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed their higher-yielding non-green twins as the “greenium” widened, and U.S. green stocks outperformed brown as climate concerns strengthened. Despite that outperformance, we estimate lower expected returns for green stocks than for brown, consistent with theory. We estimate expected returns in two ways: ex ante, using implied costs of capital, and ex post, using realized returns purged of shocks from climate concerns and earnings. A theoretically motivated green factor explains much of value stocks’ recent underperformance.

  Related
  Links

  Link to data (including returns on the green factor and GMB portfolio)

  Files

  Internet Appendix for Dissecting Green Returns
• Robert F. Stambaugh, Lubos Pastor, Luke Taylor, Min Zhu (2022), Diseconomies of Scale in Active Management: Robust Evidence, Critical Finance Review, 11 (), pp. 593-611. Abstract

  We take a deeper look at the robustness of evidence presented by Pastor, Stambaugh, and Taylor (2015) and Zhu (2018), who find that an actively managed mutual fund’s returns relate negatively to both fund size and the size of the active mutual fund industry. When we apply robust regression methods, we confirm both studies’ inferences about scale diseconomies at the fund and industry levels. Moreover, data errors play no role, as both studies’ results are insensitive to applying various error screens and using alternative return benchmarks. We reject constant returns to scale even after dropping 25% of the most extreme return observations. Finally, we caution that asymmetric removal of influential observations delivers biased conclusions about diseconomies of scale.

  Related
  Links
• Lubos Pastor, Robert F. Stambaugh, Luke Taylor (2021), Sustainable Investing in Equilibrium, Journal of Financial Economics, 142 (), pp. 550-571. Abstract

  We model investing that considers environmental, social, and governance (ESG) criteria. In equilibrium, green assets have low expected returns because investors enjoy holding them and because green assets hedge climate risk. Green assets nevertheless outperform when positive shocks hit the ESG factor, which captures shifts in customers’ tastes for green products and investors’ tastes for green holdings. The ESG factor and the market portfolio price assets in a two-factor model. The ESG investment industry is largest when investors’ ESG preferences differ most. Sustainable investing produces positive social impact by making firms greener and by shifting real investment toward green firms.

• Lubos Pastor, Robert F. Stambaugh, Luke Taylor (2020), Fund Tradeoffs, Journal of Financial Economics, 138 (), pp. 614-634. Abstract

  We study tradeoffs among active mutual funds’ characteristics. In both our equilibrium model and the data, funds with larger size, lower expense ratio, and higher turnover hold more-liquid portfolios. Portfolio liquidity, a concept introduced here, depends not only on the liquidity of the portfolio’s holdings but also on the portfolio’s diversification. We also confirm other model-predicted tradeoffs: Larger funds are cheaper. Larger and cheaper funds are less active, based on our new measure of activeness. Better-diversified funds hold less-liquid stocks; they are also larger, cheaper, and trade more. These tradeoffs provide novel evidence of diseconomies of scale in active management.

  Related
  Files

  Internet Appendix
• Winston Wei Dou, Luke Taylor, Wei Wang, Wenyu Wang (Working), Dissecting Bankruptcy Frictions.
• Luke Taylor, Di Li, Wenyu Wang (2018), Inefficiencies and Externalities from Opportunistic Acquirers, Journal of Financial Economics.
• Lubos Pastor, Robert F. Stambaugh, Luke Taylor (2017), Do Funds Make More When They Trade More?, Journal of Finance, 72 (), pp. 1483-1528. Abstract

  We find that active mutual funds perform better after trading more.  This time-series relation between a fund’s turnover and its subsequent benchmark-adjusted return is especially strong for small, high-fee funds.   These results are consistent with high-fee funds having greater skill to identify time-varying profit opportunities and with small funds being more able to exploit those opportunities.   In addition to this novel evidence of managerial skill and fund-level decreasing returns to scale, we find evidence of industry-level decreasing returns:   The positive turnover-performance relation weakens when funds act more in concert.   We also identify a common component of fund trading that is correlated with mispricing proxies and helps predict fund returns.

  Related
  Files

  Online Appendix
• Ryan Heath Peters and Luke Taylor (Forthcoming), Intangible Capital and the Investment-q Relation. Abstract

  Including intangible capital significantly changes how we evaluate theories of investment. We show that including intangible capital in measures of investment and Tobin’s q produces a stronger investment-q relation, especially in macroeconomic data and in firms that use more intangibles. These results lend support to the classic q theory of investment, and they call for the inclusion of intangible capital in proxies for firms’ investment opportunities. However, including intangible capital also makes the investment-cash flow relation almost an order of magnitude stronger, which supports newer investment theories. The classic q theory performs better in settings with more intangible capital.

• Lubos Pastor, Robert F. Stambaugh, Luke Taylor (2015), Scale and Skill in Active Management, Journal of Financial Economics, 116 (), pp. 23-45. Abstract

  We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund?s ability to outperform passive benchmarks declines. At the fund level, all methods considered indicate decreasing returns, though estimates that avoid econometric biases are insignificant. We also find that the active management industry has become more skilled over time. This upward trend in skill coincides with industry growth, which precludes the skill improvement from boosting fund performance. Finally, we find that performance deteriorates over a typical fund?s lifetime. This result can also be explained by industry-level decreasing returns to scale.

  Related
  Files

  Online Appendix
• All Research from Luke Taylor »

Current Courses

• FNCE7500 - Venture Capital And The Finance Of Innovation

  This course covers the finance of technological innovation, with a focus on the valuation tools useful in the venture capital industry. These tools include the "venture capital method," comparables analysis, discounted cash flow analysis, contingent-claims analysis. The primary audience for this course is finance majors interested in careers in venture capital or in R&D-intensive companies in health care or information technology.

  FNCE7500001 ( Syllabus )

  FNCE7500002 ( Syllabus )

Past Courses

• FNCE2500 - Vent Cap & Fnce of Innovation

  This course covers the finance of technological innovation, with a focus on the valuation tools useful in the venture capital industry. These tools include the "venture capital method," comparables analysis, discounted cash flow analysis, contingent-claims analysis. The primary audience for this course is finance majors interested in careers in venture capital or in R&D-intensive companies in health care or information technology.

• FNCE7500 - Vent Cap & Fnce Innovat

  This course covers the finance of technological innovation, with a focus on the valuation tools useful in the venture capital industry. These tools include the "venture capital method," comparables analysis, discounted cash flow analysis, contingent-claims analysis. The primary audience for this course is finance majors interested in careers in venture capital or in R&D-intensive companies in health care or information technology.

• FNCE8990 - Independent Study

  Independent Study Projects require extensive independent work and a considerable amount of writing. ISP in Finance are intended to give students the opportunity to study a particular topic in Finance in greater depth than is covered in the curriculum. The application for ISP's should outline a plan of study that requires at least as much work as a typical course in the Finance Department that meets twice a week. Applications for FNCE 8990 ISP's will not be accepted after the THIRD WEEK OF THE SEMESTER. ISP's must be supervised by a Standing Faculty member of the Finance Department.

• FNCE9260 - Empirical Meth Corp Fn

  The course will cover a variety of micro-econometric models and methods including panel data models, program evaluation methods e.g. difference in differences, matching techniques, regression discontinuity design, instrumental variables, duration models, structural estimation, simulated methods of moments. The structure of the course consists of lectures, student presentations, and empirical exercises. Published studies will be utilized in a variety of fields such as corporate finance, labor economics, and industrial organization to illustrate the various techniques. The goal of the course is to provide students with a working knowledge of various econometric techniques that they can apply in their own research. As such, the emphasis of the course is on applications, not theory. Students are required to have taken a graduate sequence in Econometrics, you should be comfortable with econometrics at the level of William Green's "Econometric Analysis of Cross-Section and Panel Data".

• The Facebook IPO: What Went Wrong?, Knowledge @ Wharton - 05/23/2012

Knowledge @ Wharton

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