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Delegated portfolio management with career concerns

  • Scotti, Massimo

The paper proposes a model of delegated portfolio management in which career concerns lead to unprofitable trade by uninformed managers (i.e. churning). We find that churning does not necessarily reduce the return that a representative investor expects ex-ante from delegating trade to a manager. As uninformed managers churn, the level of noise in the market increases and informed managers generate higher returns than in the absence of churning. When fundamental volatility is relatively low, uninformed managers trade less aggressively and the high returns expected from informed managers more than compensate the losses expected from uninformed managers. While career concerns generally lead to an increase in trade volume, the pattern of churning that we highlight also implies that both the volume of uninformed trade and the aggregate volume of trade are positively related to the level of asset riskiness.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167268112002053
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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 84 (2012)
Issue (Month): 3 ()
Pages: 829-839

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Handle: RePEc:eee:jeborg:v:84:y:2012:i:3:p:829-839
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. Franklin Allen, 2001. "Presidential Address: Do Financial Institutions Matter?," Journal of Finance, American Finance Association, vol. 56(4), pages 1165-1175, 08.
  2. He, Hua & Wang, Jiang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 919-72.
  3. James Dow & Gary Gorton, . "Noise Trading, Delegated Portfolio Management, and Economic Welfare," Rodney L. White Center for Financial Research Working Papers 19-94, Wharton School Rodney L. White Center for Financial Research.
  4. Trueman, Brett, 1988. " A Theory of Noise Trading in Securities Markets," Journal of Finance, American Finance Association, vol. 43(1), pages 83-95, March.
  5. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-68, February.
  6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  7. Veronica Guerrieri & Peter Kondor, 2012. "Fund Managers, Career Concerns, and Asset Price Volatility," American Economic Review, American Economic Association, vol. 102(5), pages 1986-2017, August.
  8. Huddart, Steven, 1999. "Reputation and performance fee effects on portfolio choice by investment advisers1," Journal of Financial Markets, Elsevier, vol. 2(3), pages 227-271, August.
  9. Rochet, J.C. & Vila, J.L., 1993. "Insider Trading Without Normality," Papers 93.b, Toulouse - GREMAQ.
  10. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2003. "Incentive Fees and Mutual Funds," Journal of Finance, American Finance Association, vol. 58(2), pages 779-804, 04.
  11. Franklin Allen, 2001. "Do Financial Institutions Matter?," Center for Financial Institutions Working Papers 01-04, Wharton School Center for Financial Institutions, University of Pennsylvania.
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