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Portfolio Delegation Under Short-Selling Constraints

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  • JUAN PEDRO GOMEZ

    ()
    (Instituto de Empresa)

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    Abstract

    We study delegated portfolio management when the manager´s ability to short-sell is restricted.Contrary to previous results, we show that under moral hazard, linear performance-adjusted contracts do provide portfolio managers with incentives to gather information.We find that the risk-averse manager´s effort is an increasing function of her share in the portfolio´s return.This result affects the risk-averse investor´s choice of contracts.Unlike previous results, the purely risk-sharing contract is now shown to be suboptimal.Using numerical methods we show that under optimal linear contract, manager´s share in the portfolio return is higher than what it is under a purely risk sharing contract

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    File URL: http://latienda.ie.edu/working_papers_economia/WP05-07.pdf
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    Bibliographic Info

    Paper provided by Instituto de Empresa, Area of Economic Environment in its series Working Papers Economia with number wp05-07.

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    Length: 28 pages
    Date of creation: Jan 2005
    Date of revision:
    Handle: RePEc:emp:wpaper:wp05-07

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    Keywords: Linear performance-adjusted contracts; Short-selling constraints; Third best effort;

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    1. Stoughton, Neal M, 1993. " Moral Hazard and the Portfolio Management Problem," Journal of Finance, American Finance Association, American Finance Association, vol. 48(5), pages 2009-28, December.
    2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(2), pages 145-161, March.
    3. Heinkel, Robert & Stoughton, Neal M, 1994. "The Dynamics of Portfolio Management Contracts," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 7(2), pages 351-87.
    4. Almazan, Andres & Brown, Keith C. & Carlson, Murray & Chapman, David A., 2004. "Why constrain your mutual fund manager?," Journal of Financial Economics, Elsevier, Elsevier, vol. 73(2), pages 289-321, August.
    5. 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.
    6. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, Elsevier, vol. 36(1), pages 1-25, June.
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