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.

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.

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.

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.

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.