Advanced Search
MyIDEAS: Login

Relative Performance Evaluation Contracts and Asset Market Equilibrium

Contents:

Author Info

  • Kapur, Sandeep
  • Timmermann, Allan G

Abstract

We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund's absolute performance and its performance relative to rival funds. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the parameters of the optimal contract subject to the fund manager's participation constraint. We find that the impact of relative performance evaluation on equilibrium equity premium and on portfolio-herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and performance evaluation may lower the equity premium.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cepr.org/pubs/dps/DP4038.asp
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4038.

as in new window
Length:
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:cpr:ceprdp:4038

Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

Related research

Keywords: equity premium; portfolio delegation; relative performance evaluation;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
  2. Judith A. Chevalier & Glenn D. Ellison, 1995. "Risk Taking by Mutual Funds as a Response to Incentives," NBER Working Papers 5234, National Bureau of Economic Research, Inc.
  3. Admati, Anat R & Pfleiderer, Paul, 1997. "Does It All Add Up? Benchmarks and the Compensation of Active Portfolio Managers," The Journal of Business, University of Chicago Press, vol. 70(3), pages 323-50, July.
  4. Palomino, F.A. & Prat, A., 1998. "Risk Taking and Optimal Contracts for Money Managers," Discussion Paper 1998-108, Tilburg University, Center for Economic Research.
  5. Robert Gibbons & Kevin Murphy, 1989. "Relative Performance Evaluation for Chief Executive Officers," Working Papers 628, Princeton University, Department of Economics, Industrial Relations Section..
  6. Nanda, Vikram & Narayanan, M. P. & Warther, Vincent A., 2000. "Liquidity, investment ability, and mutual fund structure," Journal of Financial Economics, Elsevier, vol. 57(3), pages 417-443, September.
  7. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
  8. Peter Diamond, 1998. "Managerial Incentives: On the Near Linearity of Optimal Compensation," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 931-957, October.
  9. Habib, Michel A. & Johnsen, D. Bruce & Naik, Narayan Y., 1997. "Spinoffs and Information," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 153-176, April.
  10. Sanjiv Ranjan Das & Rangarajan K. Sundaram, 2002. "Fee Speech: Signaling, Risk-Sharing, and the Impact of Fee Structures on Investor Welfare," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1465-1497.
  11. Eichberger, Jurgen & Grant, Simon & King, Stephen P., 1999. "On relative performance contracts and fund manager's incentives," European Economic Review, Elsevier, vol. 43(1), pages 135-161, January.
  12. John R. Graham & Campbell R. Harvey, 2001. "Expectations of Equity Risk Premia, Volatility and Asymmetry from a Corporate Finance Perspective," NBER Working Papers 8678, National Bureau of Economic Research, Inc.
  13. Elroy Dimson & Paul Marsh & Mike Staunton, 2003. "Global Evidence On The Equity Risk Premium," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(4), pages 27-38.
  14. Mark Grinblatt & Sheridan Titman, . "Adverse Risk Incentives and the Design of Performance-Based Contracts," Rodney L. White Center for Financial Research Working Papers 21-88, Wharton School Rodney L. White Center for Financial Research.
  15. Sanjiv Ranjan Das & Rangarajan K. Sundaram, 1998. "On the Regulation of Fee Structures in Mutual Funds," NBER Working Papers 6639, National Bureau of Economic Research, Inc.
  16. Matthew Spiegel & Harry Mamaysky, 2001. "A Theory of Mutual Funds: Optimal Fund Objectives and Industry Organization," Yale School of Management Working Papers amz2507, Yale School of Management.
  17. Mark Grinblatt & Sheridan Titman, 1989. "Adverse Risk Incentives and the Design of Performance-Based Contracts," Management Science, INFORMS, vol. 35(7), pages 807-822, July.
  18. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  19. Eugene Fama & F. & Kenneth R. French, . "The Equity Premium."," CRSP working papers 522, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  20. Brennan, Michael J., 1993. "Agency and Asset Pricing," University of California at Los Angeles, Anderson Graduate School of Management qt53k014sd, Anderson Graduate School of Management, UCLA.
  21. Matthew I. Spiegel & Harry Mamaysky, 2001. "A Theory of Mutual Funds: Optimal Fund Objectives and Industry Organization," Yale School of Management Working Papers ysm219, Yale School of Management.
  22. S. Bhattacharya, 1999. "Delegated portfolio management, no churning, and relative performance-based incentive/sorting schemes," THEMA Working Papers 99-22, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Cuoco, Domenico & Kaniel, Ron, 2011. "Equilibrium prices in the presence of delegated portfolio management," Journal of Financial Economics, Elsevier, vol. 101(2), pages 264-296, August.
  2. Blake, David & Timmermann, Allan & Tonks, Ian & Wermers, Russ, 2010. "Decentralized investment management: evidence from the pension fund industry," MPRA Paper 35767, University Library of Munich, Germany.
  3. Jean-Daniel Guigou & Patrick De Lamirande & Bruno Lovat, 2011. "Strategic delegation and collusion: Do incentive schemes matter?," LSF Research Working Paper Series 11-02, Luxembourg School of Finance, University of Luxembourg.
  4. Premachandra, I.M. & Zhu, Joe & Watson, John & Galagedera, Don U.A., 2012. "Best-performing US mutual fund families from 1993 to 2008: Evidence from a novel two-stage DEA model for efficiency decomposition," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3302-3317.
  5. Opazo, Luis & Raddatz, Claudio & Schmukler, Sergio L., 2009. "The long and the short of emerging market debt," Policy Research Working Paper Series 5056, The World Bank.
  6. Gehrig, Thomas P. & Lütje, Torben & Menkhoff, Lukas, 2008. "Bonus Payments and Fund Managers' Behavior: Trans-Atlantic Evidence," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-411, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  7. Raddatz, Claudio & Schmukler, Sergio L., 2011. "Deconstructing herding : evidence from pension fund investment behavior," Policy Research Working Paper Series 5700, The World Bank.
  8. Huang, Shiyang & Qiu, Zhigang & Shang, Qi & Tang, Ke, 2013. "Asset pricing with heterogeneous beliefs and relative performance," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4107-4119.
  9. Cuoco, Domenico & Kaniel, Ron, 2009. "Equilibrium Prices in the Presence of Delegated Portfolio Management," CEPR Discussion Papers 7453, C.E.P.R. Discussion Papers.
  10. Liu, Xiangbo & Qiu, Zhigang & Xiong, Yan, 2013. "VaR constrained asset pricing with relative performance," Economics Letters, Elsevier, vol. 121(2), pages 174-178.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4038. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.