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

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Author Info
M. K. Berkowitz
Y. Kotowitz

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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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File URL: http://links.jstor.org/sici?sici=0008-4085%28199311%2926%3A4%3C850%3AIAEITM%3E2.0.CO%3B2-Y
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Publisher 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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  1. 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, vol. 24(4), pages 379-397, June. [Downloadable!] (restricted)
  2. Judith Chevalier & Glenn Ellison, 1998. "Career Concerns of Mutual Fund Managers," NBER Working Papers 6394, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!]
  4. Asger Lunde & Allan Timmermann & David Blake, 1998. "The Hazards of Mutual Fund Underperformance: A Cox Regression Analysis," University of California at San Diego, Economics Working Paper Series 1998-11, Department of Economics, UC San Diego. [Downloadable!]
  5. Michael K. Berkowitz & Yehuda Kotowitz, 1997. "The Determinants of Management Expenses," Working Papers berk-97-02, University of Toronto, Department of Economics. [Downloadable!]
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