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Managing other people's money: An agency theory in financial management industry

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  • Dimitris Papadimitriou
  • Konstantinos Tokis
  • Georgios Vichos
  • Panos Mourdoukoutas

Abstract

We build an active asset management model to study the interplay between the career concerns of a manager and prevailing market conditions. We show that fund managers overinvest in market‐neutral strategies, as these have a reputational benefit. This benefit is smaller in bull markets, when investors expect more managers to use high‐beta strategies, making their performance less informative about their ability than in bear markets. Consequently, fund flows that follow high‐beta strategies are less responsive to the fund's performance, and flow‐performance sensitivity is higher in bear markets than in bull markets.

Suggested Citation

  • Dimitris Papadimitriou & Konstantinos Tokis & Georgios Vichos & Panos Mourdoukoutas, 2024. "Managing other people's money: An agency theory in financial management industry," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 47(1), pages 179-209, March.
    • Handle: RePEc:bla:jfnres:v:47:y:2024:i:1:p:179-209
    DOI: 10.1111/jfir.12344
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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