David Schumacher | Associate Professor of Finance

Ongoing Projects

Why Enter the ETF Market with Mutual Fund Managers?

(joint with M. Luo).

Full abstract

About 45% of mutual fund firms that offer ETFs use active mutual fund managers to manage their ETFs. Firms select active managers based on their institutional client relationships, not their investment skill, to take on such dual roles. Following such transitions, institutional clients withdraw capital from mutual funds but reinvest a fraction of it back into the manager's ETFs. These dual-role arrangements frequently occur around the firm's entry into the ETF market with institutional clients providing seed and certification capital to the firm's new ETFs. This strategy allows firms to grow their ETF business more strongly compared to firms that employ dedicated ETF managers. Our results also indicate that not entering the ETF market at all likely results a slow but prolonged total loss of institutional capital, especially in the presence of rising ETF competition.

"Firms staff ETFs with mutual fund managers to leverage client ties and raise seed capital, boosting ETF growth but suffering mutual fund outflows."

Relationship Lending in Bond Markets?

(joint with P. Beaumont and G. Weitzner).

Full abstract

We use callable bonds as a laboratory to test whether relationship lending can be sustained in public financial markets. Fixed-price calls allow firms to repurchase bonds at a low price, resulting in a transfer from debtholders to equityholders. We show that following a fixed-price call, existing bondholders are less likely to participate in the firm's future bond issuances. This behavior, which resembles punishment in reputation models, is more pronounced for funds managed by large families. We also show that large-family funds behave like relationship lenders and that firms are less likely to call their bonds when there are more of them in their bondholder base. Finally, firms that develop a reputation for calling aggressively incur higher subsequent borrowing costs. Our results provide evidence of relationship lending in bond markets sustained through firm reputation.

"Callable bonds reveal reputation-based relationship lending, where aggressive calls are punished and raise future borrowing costs."

Published Projects

Liquidity Picking and Fund Performance

(joint with F. Jiao and S. Sarkissian). Journal of Financial Economics 170, 2025.

Full abstract

Using global mutual fund and American Depositary Receipt (ADR) data, we test if funds strategically trade cross-listed firms' equity shares in the most liquid trading location. We find that especially funds that score high on traditional skill measures exhibit a liquidity-based trading venue preference. We identify an informed trading motive as the most likely driver for such behaviour rather than preference based on geographic, economic, cultural, or governance motives. Thus, liquidity picking is associated with fund outperformance and stock selection ability that is not limited to only cross-listed firms. Our tests directly support theories of informed trading in a multi-market setting.

"Skilled funds strategically trade cross-listed stocks in the most liquid venue, linking liquidity choice to performance."

Repurchases for Price Impact: Evidence from Fragile Stocks

(joint with M. Massa and Y. Wang). Journal of Financial and Quantitative Analysis 60(5), 2025, 2334-2366.

Full abstract

We highlight an important but overlooked characteristic of financial fragility: "Fragile" stocks command higher liquidity. This reduces their sensitivity to corporate actions with price impact and affects the firms' incentives to engage in such actions. We show that fragile firms have lower share repurchases, issue more equity, and invest more. We establish causality by relating changes in corporate actions to exogenous changes in fragility induced by mergers of asset managers. Our results suggest that financial fragility has direct but unexpected real implications for corporate actions.

Media coverage: Harvard Law School Forum on Corporate Governance.

"Fragile stocks are more liquid, which dampens price-impact incentives and changes firms' repurchase, issuance, and investment behavior."

Returns to Scale from Labor Specialization: Evidence from Global Asset Management

(joint with M. Luo and A. Manconi). Review of Asset Corporate Finance Studies 13(2), 2024, 384-427.

Full abstract

We study human capital synergies in asset management mergers that stem from the improved ability to assign fund managers to more specialized tasks in larger firms. More specialized task assignment allows rotated managers to focus on their investment expertise and leads to incremental $54 million of value added per deal per year on average. The effects are concentrated in mergers that lead to a large increase in firm size and in funds whose management appears less specialized prior to the merger. Our results provide direct evidence on the role of firms in the assignment of tasks to fund managers.

Media coverage: 929.

"Larger asset-manager mergers create value by enabling tighter labor specialization and better task assignment."

Mutual Fund Proliferation and Entry Deterrence

(joint with S. Betermier and A. Shahrad). Review of Asset Pricing Studies 13(4), 2023, 784-829.

Full abstract

Why do so few mutual fund families launch so many funds and styles around the world? We argue that launching numerous funds on an increasingly granular style grid allows incumbent families to congest the product space and deter market entry. Key to this argument is the persistently low dimensionality of the mutual fund product space, a fact we establish by analyzing the names of over 40,000 equity funds sold in 91 countries between 1931 and 2015. Over time, the strategy of filling up the style grid has led to the dominance of few families offering large, granular, and similar fund menus.

"Incumbent fund families deter entry by proliferating funds to congest a low-dimensional style grid."

Who Is Afraid of BlackRock?

(joint with M. Massa and Y. Wang). Review of Financial Studies 34(4), 2021, 1987-2044.

Full abstract

We exploit the merger between BlackRock and Barclays Global Investors to study how changes in expected ownership concentration affect the investment behavior of funds and the cross-section of stocks worldwide. We find that funds with open-end structures and large exposure to commonly held stocks begin avoiding these stocks following the merger announcement. This leads to a permanent change in the composition of institutional ownership and a negative price and liquidity impact. We confirm these results in a large sample of global asset management mergers. Our findings suggest that market participants behave strategically in response to changes in expected financial fragility.

Media coverage: Harvard Law School Forum on Corporate Governance, The Economist, Spiegel, Ignites, Fund Fire, CIO, Top1000funds.com, The Business Times Singapore, 929, Handelsblatt, Manager Magazin. Co-author Massimo Massa was interviewed by CNBC.

"Large asset-manager mergers shift ownership concentration and trigger strategic trading that reshapes liquidity and prices across markets."

Information Barriers in Global Markets: Evidence from International Subcontracting Relationships

(joint with M. Massa). Journal of Financial and Quantitative Analysis 55(6), 2020, 2037-2072.

Full abstract

We study the link between information barriers in global markets and the organizational form of asset management. Fund families outsource funds in which they are at an informational disadvantage to generate performance. Using a structural model of self-selection, we endogenize the outsourcing decision and estimate positive gains from outsourcing of 4-14 basis points per month, thereby reconciling underperformance of outsourced funds with performance maximization by fund families. The gains from outsourcing provide a novel proxy for the information barriers that segment global financial markets: The more segmented the underlying markets where the funds invest, the larger the gains from outsourcing.

"Outsourcing is a response to information barriers, and a structural model shows it can create measurable performance gains for fund families."

Home Bias Abroad: Domestic Industries and Foreign Portfolio Choice

Review of Financial Studies 31(5), 2018, 1654-1706.

Full abstract

In their foreign portfolio allocations, international mutual funds overweight industries that are comparatively large in their domestic stock market. Aggregate excess foreign industry allocations are sizeable, on average amounting to over 100% for the largest domestic industries. While this foreign industry bias partly reflects familiarity-based motives, a large body of evidence on investment and performance patterns is, on the whole, remarkably consistent with a specialized learning motive contributing to the bias. This suggests that differences in industry structures across domestic stock markets proxy for international information asymmetries.

"International funds are biased towards industries that are large at home and this reflects information advantages and learning."

Outsourcing in the International Mutual Fund Industry: An Equilibrium View

(joint with O. Chuprinin and M. Massa). Journal of Finance 70(5), 2015, 2275-2308.

Full abstract

We study outsourcing relationships among international asset management firms. We find that in companies that manage both outsourced and in-house funds, in-house funds outperform outsourced funds by 0.85% annually (57% of the expense ratio). We attribute this result to preferential treatment of in-house funds via the preferential allocation of IPOs, trading opportunities, and cross-trades, especially at times when in-house funds face steep outflows and require liquidity. We explain preferential treatment with agency problems: it increases with the subcontractor's market power and the difficulty of monitoring the subcontractor, and decreases with the subcontractor's amount of parallel in-house activity.

"Inhouse funds outperform outsourced funds because agency frictions create preferential treatment within asset management families."

Inactive Projects

Contagion and Decoupling in Intermediated Financial Markets

Full abstract

I analyze the interplay between fundamental and intermediation risk in a multi-asset dynamic general equilibrium model with heterogeneous agents. Agents differ in their level of direct access to investment opportunities. Intermediation relationships are formed to overcome limited market access. Intermediation risk is captured via frictions in the relationships between agents that introduce fragility into asset prices. Asset prices are fragile when they have a concentrated investor base making them dependent on the fortunes of a few investors. In contrast, a non-concentrated investor base makes asset prices resilient with respect to intermediation risk. But not all assets with a concentrated investor base are fragile. I identify fundamental characteristics that induce resilience in assets with a common concentrated investor base. These characteristics lead to portfolio rebalancing within the common investor base that makes some assets resilient and renders others fragile in the presence of intermediation risk. Likewise, in a multi-asset framework, assets that are resilient due to a broad investor base are not completely immune to the fragility experienced by other assets. In a dynamic context, fragile assets tend to experience contagion whereas resilient assets tend to decouple whenever the intermediation frictions are severe. I argue that an understanding of the dynamic behavior of asset prices requires an understanding of fundamental and intermediation risk as well as the interaction between the two.

"A dynamic multi-asset model shows how intermediation frictions create fragility, contagion, and decoupling across markets."