The Cross-section of Managerial Ability, Incentives, and Risk Preferences
Ralph S. J. Koijen
London Business School - Department of Finance; Centre for Economic Policy Research (CEPR)
October 16, 2012
EFA 2008 Athens Meetings Paper
AFA 2009 San Francisco Meetings Paper
I estimate a dynamic investment model for mutual managers to study the cross-sectional distribution of ability, incentives, and risk preferences. The manager's compensation depends on the size of the fund, which fluctuates due to fund returns and due to fund flows that respond to the fund's relative performance. The model provides an economic interpretation of time-varying coefficients in performance regressions in terms of the structural parameters. I document that the estimates of fund alphas are precise and virtually unbiased. I find substantial heterogeneity in ability, risk preferences, and pay-for-performance sensitivities that relates to observable fund characteristics.
Number of Pages in PDF File: 88
Keywords: mutual fund performance measurement, structural estimation
Date posted: March 23, 2009 ; Last revised: October 17, 2012
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