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Delegated portfolio management with career concerns

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Author Info

  • Scotti, Massimo

Abstract

The paper proposes a model of delegated portfolio management in which career concerns lead to unprofitable trade by uninformed managers (i.e. churning). We find that churning does not necessarily reduce the return that a representative investor expects ex-ante from delegating trade to a manager. As uninformed managers churn, the level of noise in the market increases and informed managers generate higher returns than in the absence of churning. When fundamental volatility is relatively low, uninformed managers trade less aggressively and the high returns expected from informed managers more than compensate the losses expected from uninformed managers. While career concerns generally lead to an increase in trade volume, the pattern of churning that we highlight also implies that both the volume of uninformed trade and the aggregate volume of trade are positively related to the level of asset riskiness.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 84 (2012)
Issue (Month): 3 ()
Pages: 829-839

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Handle: RePEc:eee:jeborg:v:84:y:2012:i:3:p:829-839

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Career concerns; Financial equilibrium; Investor returns; Trade volume;

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References

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  1. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-68, February.
  2. Veronica Guerrieri & Peter Kondor, 2012. "Fund Managers, Career Concerns, and Asset Price Volatility," American Economic Review, American Economic Association, vol. 102(5), pages 1986-2017, August.
  3. Huddart, Steven, 1999. "Reputation and performance fee effects on portfolio choice by investment advisers1," Journal of Financial Markets, Elsevier, vol. 2(3), pages 227-271, August.
  4. Trueman, Brett, 1988. " A Theory of Noise Trading in Securities Markets," Journal of Finance, American Finance Association, vol. 43(1), pages 83-95, March.
  5. Hua He & Jiang Wang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," NBER Working Papers 5010, National Bureau of Economic Research, Inc.
  6. Franklin Allen, 2001. "Presidential Address: Do Financial Institutions Matter?," Journal of Finance, American Finance Association, vol. 56(4), pages 1165-1175, 08.
  7. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2003. "Incentive Fees and Mutual Funds," Journal of Finance, American Finance Association, vol. 58(2), pages 779-804, 04.
  8. Franklin Allen, 2001. "Do Financial Institutions Matter?," Center for Financial Institutions Working Papers 01-04, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Rochet, Jean-Charles & Vila, Jean-Luc, 1994. "Insider Trading without Normality," Review of Economic Studies, Wiley Blackwell, vol. 61(1), pages 131-52, January.
  10. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  11. Dow, James & Gorton, Gary, 1997. "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1024-50, October.
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