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Delegated asset management, investment mandates, and capital immobility

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  • He, Zhiguo
  • Xiong, Wei

Abstract

This paper develops a model to explain the widely used investment mandates in the institutional asset management industry based on two insights: first, giving a manager more investment flexibility weakens the link between fund performance and his effort in the designated market, and thus increases agency cost. Second, the presence of outside assets with negatively skewed returns can further increase the agency cost if the manager is incentivized to pursue outside opportunities. These effects motivate narrow mandates and tight tracking error constraints to most fund managers except those with exceptional talents. Our model sheds light on capital immobility and market segmentation that are widely observed in financial markets, and highlights important effects of negatively skewed risk on institutional incentive structures.

Suggested Citation

  • He, Zhiguo & Xiong, Wei, 2013. "Delegated asset management, investment mandates, and capital immobility," Journal of Financial Economics, Elsevier, vol. 107(2), pages 239-258.
  • Handle: RePEc:eee:jfinec:v:107:y:2013:i:2:p:239-258
    DOI: 10.1016/j.jfineco.2012.08.010
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    1. repec:eee:jetheo:v:173:y:2018:i:c:p:289-319 is not listed on IDEAS
    2. Dass, Nishant & Nanda, Vikram & Wang, Qinghai, 2013. "Allocation of decision rights and the investment strategy of mutual funds," Journal of Financial Economics, Elsevier, vol. 110(1), pages 254-277.

    More about this item

    Keywords

    Institutional frictions; Negatively skewed risk; Tracking error constraints; Market segmentation;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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