Abstract

http://ssrn.com/abstract=2154275
 


 



The Quality-Assuring Role of Mutual Fund Advisory Fees


Michel A. Habib


University of Zurich; Swiss Finance Institute

D. Bruce Johnsen


George Mason University - School of Law; PERC - Property and Environment Research Center

February 20, 2015

George Mason Law & Economics Research Paper No. 12-64

Abstract:     
Active fund managers implicitly promise to research profitable portfolio selection. But active management is an experience good subject to moral hazard. Investors cannot tell high from low quality up front and therefore fear manager shirking. We show how the parties mitigate the moral hazard by paying the manager a premium fee sufficiently high that the manager’s one-time gain from shirking is less than the capitalized value of the premium stream he earns from maintaining his promise to provide high quality. Premium advisory fees act as a quality-assuring bond. Our model has a number of revealing extensions and comparative statics.

Number of Pages in PDF File: 44

Keywords: excessive fees, advisory fees, quality-assurance, open-access, closet indexing

JEL Classification: D23, D86, G23, L22


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Date posted: September 30, 2012 ; Last revised: February 25, 2015

Suggested Citation

Habib, Michel A. and Johnsen, D. Bruce, The Quality-Assuring Role of Mutual Fund Advisory Fees (February 20, 2015). George Mason Law & Economics Research Paper No. 12-64. Available at SSRN: http://ssrn.com/abstract=2154275 or http://dx.doi.org/10.2139/ssrn.2154275

Contact Information

Michel A. Habib
University of Zurich ( email )
Plattenstrasse 14
Zurich, 8032
Switzerland
41-44-634-2507 (Phone)
41-44-634-4903 (Fax)
HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

D. Bruce Johnsen (Contact Author)
George Mason University - School of Law ( email )
3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8066 (Phone)
703-993-8088 (Fax)
PERC - Property and Environment Research Center
2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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