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Managing other people's money: an agency theory in financial management industry

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  • Papadimitriou, Dimitris
  • Tokis, Konstantinos
  • Vichos, Georgios
  • Mourdoukoutas, Panos

Abstract

We build an active asset management model to study the interplay between the career concerns of a manager and prevailing market conditions. We show that fund managers overinvest in market-neutral strategies, as these have a reputational benefit. This benefit is smaller in bull markets, when investors expect more managers to use high-beta strategies, making their performance less informative about their ability than in bear markets. Consequently, fund flows that follow high-beta strategies are less responsive to the fund's performance, and flow-performance sensitivity is higher in bear markets than in bull markets.

Suggested Citation

  • Papadimitriou, Dimitris & Tokis, Konstantinos & Vichos, Georgios & Mourdoukoutas, Panos, 2023. "Managing other people's money: an agency theory in financial management industry," LSE Research Online Documents on Economics 119872, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119872
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    References listed on IDEAS

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    Keywords

    Paul Woolley Centre at the LSE;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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