Career concerns and investment maturity in mutual funds
AbstractAn important puzzle in financial economics is why fund managers invest in short-maturity assets when they could obtain larger profits in assets with longer maturity. This work provides an explanation to this fact based on labor contracts signed between institutional investors and fund managers. Using a career concern setup, we examine how the optimal contract design, in the presence of both explicit and implicit incentives, affects the fund managers decisions on investment horizons. A numerical analysis characterizes situations in which young (old) managers prefer short-maturity (long-maturity) positions. However, when including multitask analysis, we find that career concerned managers are bolder and also prefer assets with long maturity.
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Contract theory; Career concerns; Financial equilibrium; Investment maturity;
Find related papers by JEL classification:
- G29 - Financial Economics - - Financial Institutions and Services - - - Other
- J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
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- von Thadden, Ernst-Ludwig, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 557-75, October.
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