Fund Managers' Contracts and Financial Markets' Short-Termism
This paper considers the problem faced by long-term investors who have to delegate the management of their money to professional fund managers. Investors can earn profits if fund managers collect long-term information. We investigate to what extent the delegation of fund management prevents long-term information acquisition, inducing short-termism. We also study the design of long-term fund managers' compensation contracts. Absent moral hazard, short-termism arises only because of the cost of information acquisition. Under moral hazard, fund managers' compensation endogenously depends on short-term price efficiency (because of the need to smooth fund managers' consumption), thereby on subsequent fund managers' information acquisition decisions. The latter are less likely to be present on the market if information has already been acquired initially, giving rise to a feedback effect. The consequences are twofold: First, this increases short-termism. Second, short-term compensation for fund managers depends in a non-monotonic way on long-term information precision. We derive predictions regarding fund managers' contracts and financial markets efficiency.
|Date of creation:||May 2009|
|Date of revision:||Feb 2011|
|Contact details of provider:|| Postal: Manufacture des Tabacs, Aile Jean-Jacques Laffont, 21 Allée de Brienne, 31000 TOULOUSE|
Phone: +33 (0)5 61 12 85 89
Fax: + 33 (0)5 61 12 86 37
Web page: http://www.idei.fr/
More information through EDIRC
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.:
- Edmans, Alex, 2011. "Does the stock market fully value intangibles? Employee satisfaction and equity prices," Journal of Financial Economics, Elsevier, vol. 101(3), pages 621-640, September.
- Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990.
"Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation,"
NBER Working Papers
3250, National Bureau of Economic Research, Inc.
- Froot, Kenneth A & Scharftstein, David S & Stein, Jeremy C, 1992. " Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," Journal of Finance, American Finance Association, vol. 47(4), pages 1461-1484, September.
- Alexander Gumbel, 1999.
"Trading on Short-Term Information,"
OFRC Working Papers Series
1999fe10, Oxford Financial Research Centre.
- Alexander Gümbel, 2005. "Trading on Short-Term Information," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(3), pages 428-428, September.
- Dow, James & Gorton, Gary, 1994.
" Arbitrage Chains,"
Journal of Finance,
American Finance Association, vol. 49(3), pages 819-849, July.
- James Dow & Gary Gorton, 1993. "Arbitrage Chains," NBER Working Papers 4314, National Bureau of Economic Research, Inc.
- James Dow & Gary Gorton, 1993. "Arbitrage Chains," CEPR Financial Markets Paper 0035, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
- James Dow & Gary Gorton, "undated". "Arbitrage Chains," Rodney L. White Center for Financial Research Working Papers 6-93, Wharton School Rodney L. White Center for Financial Research.
- James Dow & Gary Gorton, "undated". "Arbitrage Chains," Rodney L. White Center for Financial Research Working Papers 06-93, Wharton School Rodney L. White Center for Financial Research.
- Holden, Craig W & Subrahmanyam, Avanidhar, 1996. "Risk Aversion, Liquidity, and Endogenous Short Horizons," Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 691-722.
- Lev, Baruch & Sougiannis, Theodore, 1996. "The capitalization, amortization, and value-relevance of R&D," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 107-138, February.
When requesting a correction, please mention this item's handle: RePEc:ide:wpaper:9616. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.