Essays on information and investment

Abstract

This dissertation consists of three empirical essays related to information and investment. The first essay asks whether investments in advertising bias the information consumers receive about advertisers' products. Using ratings from two U.S. wine publications, only one of which accepts advertising, I find that advertisers earn differentially higher ratings than non-advertisers and that these higher ratings appear to arise through selective retastings of advertisers' wines before ratings are published. However, the small fraction of wines tasted more than once limits this bias and suggests that reputational considerations may induce publications largely to insulate reviewers from advertisers. The second essay asks whether investments in research by mutual fund families increase the returns of their actively managed funds. Using detailed expense data from 1996-1999, I find evidence that funds recover a fraction of their management fees and brokerage commissions through higher before-expense returns, but that these results are driven by positive relationships between expenses and returns in 1999. I then find more robust positive relationships between aggregate measures of research spending within the family and fund-level returns. Finally, I find that pairwise correlations of fund returns are significantly higher, on average, when both funds belong to the same family, and that these higher correlations are not simply the result of management team overlap. The final essay (joint with Eric Zitzewitz) asks whether the recent rise and fall of U.S. financial markets had real economic consequences in online auctions for fine wine.

(cont.) Using data from 63 auctions covering the 30 months from July 1999 through December 2001, we document a strong positive relationship between the number of bottles sold within an auction and fluctuations of the S&P 500 index during that auction. While average prices tend to decline as the number of bottles sold increases, we also present evidence that price changes of the rarest and most famous wines are positively correlated with stock market returns. Overall, our results imply that investors may respond more quickly to short-run changes in stock market wealth than existing theoretical and empirical work has suggested.