Portfolio Performance and Agency
AbstractIn this paper we analyze the optimal contract for a portfolio manager who can exert effort to improve the quality of a private signal about future market prices. We assume complete markets over states distinguished by asset payoffs and place no restrictions on the form of the contract. We show that trading restrictions are essential because they prevent the manager from undoing the incentive effects of performance-based fees. We provide conditions under which simple benchmarking emerges as optimal compensation. Additional incentives to take risk are necessary when information can be manipulated or else the manager will understate information to offset the benchmarking. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: firstname.lastname@example.org, Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 23 (2010)
Issue (Month): 1 (January)
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Other versions of this item:
- Philip H. Dybvig & Heber K. Farnsworth & Jennifer Carpenter, 1999. "Portfolio Performance and Agency," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-046, New York University, Leonard N. Stern School of Business-.
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