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Career concerns and investment maturity in mutual funds

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  • Portilla, Yolanda
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    Abstract

    An 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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    File URL: http://e-archivo.uc3m.es/bitstream/10016/3774/5/we091106.pdf
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    Paper provided by Universidad Carlos III de Madrid in its series Open Access publications from Universidad Carlos III de Madrid with number info:hdl:10016/3774.

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    Handle: RePEc:ner:carlos:info:hdl:10016/3774

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    Related research

    Keywords: Contract theory; Career concerns; Financial equilibrium; Investment maturity;

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    1. 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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