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Board compensation, holdings and mutual fund expense ratios

Listed author(s):
  • Eric Fricke
Registered author(s):

    Purpose - The purpose of this paper is to examine how board compensation and holdings are related to mutual fund expense ratios. Previous studies find that compensation and expense ratios are positively correlated and argue that this relationship is potential evidence of rent sharing, whereby excessively compensated boards fail to negotiate with fund managers for lower shareholder fees. Design/methodology/approach - Using a dataset of US open-end mutual funds, the author examines how geographic-based salary data, director profession, director fund holdings and fund returns might explain the relationship between compensation and fees. Findings - The results provide additional support for potential rent sharing between fund managers and directors and are robust to alternative measures of director compensation, fund sales loads, director holdings and fund returns. Research limitations/implications - The findings are limited by the sample size and the lack of time series data of the hand-collected dataset. Data are collected from 598 funds in the year 2003. Practical implications - These findings suggest that mutual fund expense ratios may be affected by potential agency costs. Social implications - Mutual fund regulatory focus has been predominantly focused on the independence of board chairmen, but this study shows that compensation may also be a significant contributor to fund governance. Originality/value - This study is unique in its recent focus on fund expense ratios and board compensation and examining potential explanations for this relationship.

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    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 39 (2013)
    Issue (Month): 3 (February)
    Pages: 228-250

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    Handle: RePEc:eme:mfipps:v:39:y:2013:i:3:p:228-250
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    1. Ferris, Stephen P. & Yan, Xuemin (Sterling), 2009. "Agency costs, governance, and organizational forms: Evidence from the mutual fund industry," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 619-626, April.
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    14. Ferris, Stephen P. & Yan, Xuemin (Sterling), 2007. "Do independent directors and chairmen matter? The role of boards of directors in mutual fund governance," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 392-420, June.
    15. Cremers, Martijn & Driessen, Joost & Maenhout, Pascal & Weinbaum, David, 2009. "Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(06), pages 1345-1373, December.
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