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Empirical Tests of a Principal-Agent Model of the Investor-Investment Advisor Relationship


  • Golec, Joseph H.


This paper develops a specialized principal-agent model of the investor-investment advisor relationship and embeds the standard advisory compensation schedule in the model. Advisors are endowed with information-gathering abilities and investors are endowed with funds. Information-gathering services are traded indirectly through the investor's receipt of portfolio returns net of advisory fees. Model results show that the parameters of the compensation schedule are both a function of the idiosyncracies of an advisor's information services and the degree of risk sharing between the advisor and investor. Several predictions of the model are supported using data on mutual fund advisors. Unsupported predictions may be due to self-selection of advisors by risk tolerance.

Suggested Citation

  • Golec, Joseph H., 1992. "Empirical Tests of a Principal-Agent Model of the Investor-Investment Advisor Relationship," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(1), pages 81-95, March.
  • Handle: RePEc:cup:jfinqa:v:27:y:1992:i:01:p:81-95_00

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    Cited by:

    1. Raphaëlle Bellando, 2008. "Le conflit d'agence dans la gestion déléguée de portefeuille : une revue de littérature," Revue d'économie politique, Dalloz, vol. 118(3), pages 317-339.
    2. Sanjiv Ranjan Das & Rangarajan K. Sundaram, 1998. "Fee Speech: Adverse Selection and the Regulation of Mutual Funds," NBER Working Papers 6644, National Bureau of Economic Research, Inc.
    3. Lonnie L. Bryant & Maureen Butler & Zhongling Cao, 2018. "Mutual Fund Fee Structures and Broker Compensation," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 197-211, May.
    4. Joanne K. Yoong & Angela Hung, 2009. "Self-Dealing and Compensation for Financial Advisors," Working Papers 713, RAND Corporation.
    5. Shaw, Frances & Dunne, Peter G., 2017. "Investment Fund Risk: The Tale in the Tails," Research Technical Papers 01/RT/17, Central Bank of Ireland.
    6. Smaby, Timothy R. & Fizel, John L., 1995. "Fund closings as a signal to investors: Investment performance of open-end mutual funds that close to new shareholders," Financial Services Review, Elsevier, vol. 4(2), pages 71-80.
    7. Casavecchia, Lorenzo & Hulley, Hardy, 2018. "Are mutual fund investors paying for noise?," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 8-23.
    8. Ching-Chang Wang & Jerry Yu, 2018. "The holdings markup behavior of mutual funds: evidence from an emerging market," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 393-414, February.
    9. Ana C. Díaz†Mendoza & Germán López†Espinosa & Miguel A. Martínez, 2014. "The Efficiency of Performance†Based Fee Funds," European Financial Management, European Financial Management Association, vol. 20(4), pages 825-855, September.
    10. Palomino, F.A. & Uhlig, H.F.H.V.S., 1999. "Should smart investors buy funds with high returns in the past," Discussion Paper 1999-69, Tilburg University, Center for Economic Research.
    11. Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2012. "Management compensation and market timing under portfolio constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 36(10), pages 1600-1625.
    12. Gong Zhan, 2011. "Manager fee contracts and managerial incentives," Review of Derivatives Research, Springer, vol. 14(2), pages 205-239, July.
    13. Najand, Mohammad & Prather, Larry J., 1999. "The risk level discriminatory power of mutual fund investment objectives: Additional evidence," Journal of Financial Markets, Elsevier, vol. 2(3), pages 307-328, August.
    14. Dirk P.M. De Wit, 1993. "Smoothing Bias in In-House Appraisal-Based Returns of Open-End Real Estate Funds," Journal of Real Estate Research, American Real Estate Society, vol. 8(2), pages 157-170.
    15. Casavecchia, Lorenzo, 2016. "Fund managers' herding and the sensitivity of fund flows to past performance," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 205-221.
    16. Joanne K. Yoong & Angela A. Hung, 2009. "Self-Dealing and Compensation for Financial Advisors," Working Papers WR-713, RAND Corporation.
    17. Shujing Li & Jiaping Qiu, 2014. "Financial Product Differentiation over the State Space in the Mutual Fund Industry," Management Science, INFORMS, vol. 60(2), pages 508-520, February.
    18. Eichberger, Jurgen & Grant, Simon & King, Stephen P., 1999. "On relative performance contracts and fund manager's incentives," European Economic Review, Elsevier, vol. 43(1), pages 135-161, January.
    19. Philipp Nussbaumer & Inu Matter & Gian Reto à Porta & Gerhard Schwabe, 2012. "Designing for Cost Transparency in Investment Advisory Service Encounters," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 4(6), pages 347-361, December.
    20. Giambona, Erasmo & Golec, Joseph, 2009. "Mutual fund volatility timing and management fees," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 589-599, April.
    21. Golec, Joseph & Starks, Laura, 2004. "Performance fee contract change and mutual fund risk," Journal of Financial Economics, Elsevier, vol. 73(1), pages 93-118, July.
    22. Cumming, Douglas & Johan, Sofia & Zhang, Yelin, 2019. "What is mutual fund flow?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 222-251.
    23. Clifford, Christopher P., 2008. "Value creation or destruction? Hedge funds as shareholder activists," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 323-336, September.
    24. Joseph T.L. Ooi, 2010. "The compensation structure of REIT managers: impact on stock valuation and performance," Journal of Property Research, Taylor & Francis Journals, vol. 26(4), pages 309-328, May.

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