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Management compensation and market timing under portfolio constraints

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  • Agarwal, Vikas
  • Gómez, Juan-Pedro
  • Priestley, Richard

Abstract

This paper shows that portfolio constraints have important implications for management compensation and performance evaluation. In particular, in the presence of portfolio constraints, allowing for benchmarking can be bene cial. Benchmark design arises as an alternative effort inducement mechanism vis-a-vis relaxing portfolio constraints. Numerically, we solve jointly for the manager's linear incentive fee and the optimal benchmark. The size of the incentive fee and the risk adjustment in the benchmark composition are increasing in the investor's risk tolerance and the manager's ability to acquire and process private information.

Suggested Citation

  • Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2012. "Management compensation and market timing under portfolio constraints," CFR Working Papers 11-16 [rev.], University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1116r
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    References listed on IDEAS

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    More about this item

    Keywords

    market timing; incentive fee; benchmarking; portfolio constraints;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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