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Is a team different from the sum of its parts? Evidence from mutual fund managers

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  • Bär, Michaela
  • Kempf, Alexander
  • Ruenzi, Stefan

Abstract

This paper provides the first empirical test of the diversification of opinions theory and the group shift theory using real business data. Our data set covers management teams and single managers of US equity mutual funds. Our results reject the group shift theory and support the diversification of opinions theory: extreme opinions of single team managers average out and, consequently, teams make less extreme decisions than individuals do. We find that teams follow less extreme investment styles and their portfolios are less industry concentrated than those of single managers and that teams are eventually less likely to achieve extreme performance outcomes. These results hold after taking into account the impact of fund and family characteristics as well as manager characteristics. Additionally, teams exhibit a lower active share and lower risk levels, driven by a lower level of idiosyncratic risk, as compared to singlemanaged funds. --

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Bibliographic Info

Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 05-10.

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Date of creation: 2005
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Handle: RePEc:zbw:cfrwps:0510

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Keywords: Mutual Funds; Team Management; Investment Behavior;

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  1. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 716-27, September.
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  3. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2004. "On the Industry Concentration of Actively Managed Equity Mutual Funds," NBER Working Papers 10770, National Bureau of Economic Research, Inc.
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  8. Prather, Larry J. & Middleton, Karen L., 2006. "Timing and selectivity of mutual fund managers: An empirical test of the behavioral decision-making theory," Journal of Empirical Finance, Elsevier, Elsevier, vol. 13(3), pages 249-273, June.
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  15. Alexander Kempf & Stefan Ruenzi, 2008. "Tournaments in Mutual-Fund Families," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(2), pages 1013-1036, April.
  16. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, American Finance Association, vol. 48(1), pages 65-91, March.
  17. Rockenbach, Bettina & Sadrieh, Abdolkarim & Mathauschek, Barbara, 2007. "Teams take the better risks," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 63(3), pages 412-422, July.
  18. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  19. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, American Finance Association, vol. 51(1), pages 85-110, March.
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