Allocation of Decision Rights and the Investment Strategy of Mutual Funds
Georgia Institute of Technology
Vikram K. Nanda
University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics
University of Wisconsin-Milwaukee
March 15, 2012
The literature suggests that while decentralized decision-making can allow for greater specialization in an organization, it heightens the cost of coordinating decisions. The mutual fund industry – in particular, sole- and team-managed balanced funds – provides an ideal setting to test the specialization vs. coordination trade-off, since information on decision structures and fund actions is easily obtained. We document that sole-managed balanced funds, with centralized decision rights, exhibit significant market timing that requires reallocation across asset classes. However, consistent with coordination difficulties between managers specializing in particular asset classes, there is no market-timing evident in team-managed balanced funds. Team-managed funds exhibit greater returns from specialization, in the form of better security-selection performance than sole-managed funds. These results hold cross-sectionally and for funds that switch management structures. The overall returns across different management structures are similar, indicating a market equilibrium. Investor flows reward market-timing performance for sole- but not team-managed funds.
Number of Pages in PDF File: 46
Keywords: teams, coordination costs, decision rights, performance, mutual funds
JEL Classification: G20, G23, D70
Date posted: March 19, 2012
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