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Incentives and Efficiency in the Market for Management Services: A Study of Canadian Mutual Funds

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  • M. K. Berkowitz
  • Y. Kotowitz

Abstract

This paper examines the incentives offered managers of Canadian equity mutual funds when their compensation is based upon the market value of the assets they manage. Although this method of compensation supplies a very weak direct link between performance and the remuneration of managers, the authors show that competition among funds supplies a stronger indirect link. Empirical evidence is provided in the paper indicating that, owing to investor expectations of positive serial correlation in the performance of mutual funds, the indirect compensation offered by asset-based schemes provides a strong incentive to managers to maximize risk-adjusted fund returns.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 26 (1993)
Issue (Month): 4 (November)
Pages: 850-66

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Handle: RePEc:cje:issued:v:26:y:1993:i:4:p:850-66

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Citations

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Cited by:
  1. Michael K. Berkowitz & Jiaping Qiu, 2001. "Ownership, Risk and Performance of Mutual Fund Management Companies," Working Papers berk-01-01, University of Toronto, Department of Economics.
  2. Ching-mann Huang & Len-kuo Hu & Hsin-Hong Kang, 2005. "Compensation Design and Career Concerns of Fund Manager," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 24(4), pages 379-397, June.
  3. Lunde, Asger & Timmermann, Allan & Blake, David, 1999. "The hazards of mutual fund underperformance: A Cox regression analysis," Journal of Empirical Finance, Elsevier, Elsevier, vol. 6(2), pages 121-152, April.
  4. Berkowitz, Michael K. & Kotowitz, Yehuda, 2000. "Investor risk evaluation in the determination of management incentives in the mutual fund industry," Journal of Financial Markets, Elsevier, Elsevier, vol. 3(4), pages 365-387, November.
  5. Michael K. Berkowitz & Yehuda Kotowitz, 1997. "The Determinants of Management Expenses," Working Papers berk-97-02, University of Toronto, Department of Economics.
  6. Berkowitz, Michael K. & Kotowitz, Yehuda, 2002. "Managerial quality and the structure of management expenses in the US mutual fund industry," International Review of Economics & Finance, Elsevier, Elsevier, vol. 11(3), pages 315-330.
  7. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns Of Mutual Fund Managers," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(2), pages 389-432, May.
  8. Deaves, Richard, 2004. "Data-conditioning biases, performance, persistence and flows: The case of Canadian equity funds," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(3), pages 673-694, March.
  9. Cashman, George D., 2010. "Pay-performance sensitivity and firm size: Insights from the mutual fund industry," Journal of Corporate Finance, Elsevier, Elsevier, vol. 16(4), pages 400-412, September.
  10. Michael K. Berkowitz & Yehuda Kotowitz, 1997. "Management Compensation and the Performance of Mutual Funds," Working Papers berk-97-01, University of Toronto, Department of Economics.
  11. Cvitanic, Jaksa & Lazrak, Ali & Wang, Tan, 2008. "Implications of the Sharpe ratio as a performance measure in multi-period settings," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(5), pages 1622-1649, May.

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