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Institutionalization, delegation, and asset prices

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  • Huang, Shiyang
  • Qiu, Zhigang
  • Yang, Liyan

Abstract

We study the effects of institutionalization on fund manager compensation and asset prices. Institutionalization raises the performance-sensitive component of the equilibrium contract, which makes institutional investors effectively more risk averse. Institutionalization affects market outcomes through two opposing effects. The direct effect is to bring in more informed capital, and the indirect effect is to make each institutional investor trade less aggressively on information through affecting the equilibrium contract. When there are many institutions and little noise trading in the market, the indirect contracting effect dominates the direct informed capital effect in determining market variables such as the cost of capital, return volatility, price volatility, and market liquidity. Otherwise, the direct informed capital effect dominates.

Suggested Citation

  • Huang, Shiyang & Qiu, Zhigang & Yang, Liyan, 2020. "Institutionalization, delegation, and asset prices," Journal of Economic Theory, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:jetheo:v:186:y:2020:i:c:s0022053119301243
    DOI: 10.1016/j.jet.2019.104977
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    More about this item

    Keywords

    Institutionalization; Delegation; Information acquisition; Agency problem; Asset prices;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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