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Ownership, Risk and Performance of Mutual Fund Management Companies

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Author Info

  • Michael K. Berkowitz
  • Jiaping Qiu

Abstract

This paper compares the performance of mutual funds managed by publicly-traded management companies with those managed by private management companies. We find that publicly-traded management companies invest in riskier assets and charge higher management fees than do the funds managed by private management companies. The risk-adjusted returns of the mutual funds managed by publicly-traded management companies are also lower than those of the mutual funds managed by private management companies. This finding is consistent with both a risk spreading and agency cost argument. The paper also shows that the idiosyncratic risk of the publicly-traded management company's stock significantly differs from the idiosyncratic risk of the assets they manage, suggesting that previous research using the stock's idiosyncratic risk as a proxy for the idiosyncratic risk of the company's assets to study the determinants of publicly-traded companies' ownership concentration may be misleading.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-BERK-01-01.pdf
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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number berk-01-01.

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Length: 44 pages
Date of creation: 11 Jul 2001
Date of revision:
Handle: RePEc:tor:tecipa:berk-01-01

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  1. Charles P. Himmelberg & R. Glenn Hubbard & Darius Palia, 2000. "Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance," NBER Working Papers 7209, National Bureau of Economic Research, Inc.
  2. Ferris, Stephen P & Chance, Don M, 1987. " The Effect of 12b-1 Plans on Mutual Fund Expense Ratios: A Note," Journal of Finance, American Finance Association, vol. 42(4), pages 1077-82, September.
  3. May, Don O, 1995. " Do Managerial Motives Influence Firm Risk Reduction Strategies?," Journal of Finance, American Finance Association, vol. 50(4), pages 1291-1308, September.
  4. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  5. 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.
  6. Elton, Edwin J, et al, 1993. "Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 1-22.
  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. Diane Del Guercio & Paula A. Tkac, 2000. "The determinants of the flow of funds of managed portfolios: mutual funds versus pension funds," Working Paper 2000-21, Federal Reserve Bank of Atlanta.
  9. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
  10. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  11. Bruce N. Lehmann & David M. Modest, 1987. "Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons," NBER Working Papers 1721, National Bureau of Economic Research, Inc.
  12. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
  13. Berkowitz, Michael K. & Kotowitz, Yehuda, 2002. "Managerial quality and the structure of management expenses in the US mutual fund industry," International Review of Economics & Finance, Elsevier, vol. 11(3), pages 315-330.
  14. Ippolito, Richard A, 1992. "Consumer Reaction to Measures of Poor Quality: Evidence from the Mutual Fund Industry," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 45-70, April.
  15. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
  16. M. K. Berkowitz & Y. Kotowitz, 1993. "Incentives and Efficiency in the Market for Management Services: A Study of Canadian Mutual Funds," Canadian Journal of Economics, Canadian Economics Association, vol. 26(4), pages 850-66, November.
  17. Zhang, Guochang, 1998. "Ownership concentration, risk aversion and the effect of financial structure on investment decisions," European Economic Review, Elsevier, vol. 42(9), pages 1751-1778, November.
  18. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  19. Berkowitz, Michael K. & Kotowitz, Yehuda, 2000. "Investor risk evaluation in the determination of management incentives in the mutual fund industry," Journal of Financial Markets, Elsevier, vol. 3(4), pages 365-387, November.
  20. Demsetz, Harold, 1983. "The Structure of Ownership and the Theory of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 375-90, June.
  21. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
  22. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
  23. A. Cole, Rebel & Mehran, Hamid, 1998. "The effect of changes in ownership structure on performance: Evidence from the thrift industry," Journal of Financial Economics, Elsevier, vol. 50(3), pages 291-317, December.
  24. Michael Berkowitz, 2001. "Common Risk Factors in Explaining Canadian Equity Returns," Working Papers berk-00-01, University of Toronto, Department of Economics.
  25. Lehmann, Bruce N & Modest, David M, 1987. " Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons," Journal of Finance, American Finance Association, vol. 42(2), pages 233-65, June.
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Cited by:
  1. Justin Davis & G. Tyge Payne & Gary McMahan, 2007. "A Few Bad Apples? Scandalous Behavior of Mutual Fund Managers," Journal of Business Ethics, Springer, vol. 76(3), pages 319-334, December.
  2. Carlos Sánchez-González & José Luis Sarto & Luis Vicente, 2013. "The efficiency of Spanish mutual funds companies: A slacks-based measure approach," Documentos de Trabajo dt2013-01, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza.
  3. Rob Bauer & Jeroen Derwall & Rogér Otten, 2007. "The Ethical Mutual Fund Performance Debate: New Evidence from Canada," Journal of Business Ethics, Springer, vol. 70(2), pages 111-124, January.

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