Relative Performance Evaluation Contracts and Asset Market Equilibrium
We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund's absolute and relative performance. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the optimal contract subject to the fund manager's participation constraint. We find that the impact of relative performance evaluation on the equilibrium equity premium and on portfolio herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and relative performance evaluation may lower the equity premium. Copyright 2005 Royal Economic Society.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 115 (2005)
Issue (Month): 506 (October)
|Contact details of provider:|| Postal: 2 Dean Trench Street, Westminster, SW1P 3HE|
Phone: +44 20 3137 6301
Web page: http://www.res.org.uk/
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishers.co.uk/asp/journal.asp?ref=0013-0133|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bhattacharya, S., 1999.
"Delegated Portfolio Management, No Churning, and Relative Performance-Based Incentive/Sorting Schemes,"
99-22, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
- S. Bhattacharya, 1999. "Delegated portfolio management, no churning, and relative performance-based incentive/sorting schemes," THEMA Working Papers 99-22, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Peter Diamond, 1998. "Managerial Incentives: On the Near Linearity of Optimal Compensation," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 931-957, October.
- Brennan, Michael J., 1993. "Agency and Asset Pricing," University of California at Los Angeles, Anderson Graduate School of Management qt53k014sd, Anderson Graduate School of Management, UCLA.
- Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, 04.
- Eugene Fama & F. & Kenneth R. French, "undated". "The Equity Premium."," CRSP working papers 522, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
- 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.
- Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
- Mark Grinblatt & Sheridan Titman, 1989. "Adverse Risk Incentives and the Design of Performance-Based Contracts," Management Science, INFORMS, vol. 35(7), pages 807-822, July.
- Mark Grinblatt & Sheridan Titman, "undated". "Adverse Risk Incentives and the Design of Performance-Based Contracts," Rodney L. White Center for Financial Research Working Papers 21-88, Wharton School Rodney L. White Center for Financial Research.
- Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
- Matthew I. Spiegel & Harry Mamaysky, 2001. "A Theory of Mutual Funds: Optimal Fund Objectives and Industry Organization," Yale School of Management Working Papers ysm219, Yale School of Management.
- Admati, Anat R & Pfleiderer, Paul, 1997. "Does It All Add Up? Benchmarks and the Compensation of Active Portfolio Managers," The Journal of Business, University of Chicago Press, vol. 70(3), pages 323-350, July.
- John R. Graham & Campbell R. Harvey, 2001. "Expectations of Equity Risk Premia, Volatility and Asymmetry from a Corporate Finance Perspective," NBER Working Papers 8678, National Bureau of Economic Research, Inc.
- Habib, Michel A. & Johnsen, D. Bruce & Naik, Narayan Y., 1997. "Spinoffs and Information," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 153-176, April.
- Nanda, Vikram & Narayanan, M. P. & Warther, Vincent A., 2000. "Liquidity, investment ability, and mutual fund structure," Journal of Financial Economics, Elsevier, vol. 57(3), pages 417-443, September.
- Palomino, Frederic & Prat, Andrea, 2003. " Risk Taking and Optimal Contracts for Money Managers," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 113-137, Spring.
- Palomino, F.A. & Prat, A., 1998. "Risk Taking and Optimal Contracts for Money Managers," Discussion Paper 1998-108, Tilburg University, Center for Economic Research.
- Palomino, Frédéric & Prat, Andrea, 1999. "Risk Taking and Optimal Contracts for Money Managers," CEPR Discussion Papers 2066, C.E.P.R. Discussion Papers.
- 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.
- Gibbons, R. & Murphy, K.J., 1989. "Relative Performance Evaluation For Chief Executive Officers," Working papers 532, Massachusetts Institute of Technology (MIT), Department of Economics.
- Robert Gibbons & Kevin J. Murphy, 1989. "Relative Performance Evaluation for Chief Executive Officers," NBER Working Papers 2944, National Bureau of Economic Research, Inc.
- Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-479, June.
- Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- 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.
- Elroy Dimson & Paul Marsh & Mike Staunton, 2003. "Global Evidence On The Equity Risk Premium," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(4), pages 27-38.
- repec:sae:ilrrev:v:43:y:1990:i:3:p:30-51 is not listed on IDEAS
- James Claus, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
- Matthew Spiegel & Harry Mamaysky, 2001. "A Theory of Mutual Funds: Optimal Fund Objectives and Industry Organization," Yale School of Management Working Papers amz2507, Yale School of Management.
- Sanjiv Ranjan Das & Rangarajan K. Sundaram, 1998. "On the Regulation of Fee Structures in Mutual Funds," NBER Working Papers 6639, National Bureau of Economic Research, Inc.
- Sanjiv Ranjan Das & Rangarajan K. Sundaram, 2002. "Fee Speech: Signaling, Risk-Sharing, and the Impact of Fee Structures on Investor Welfare," Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1465-1497. Full references (including those not matched with items on IDEAS)