Mutual Fund Performance and Governance Structure: The Role of Portfolio Managers and Boards of Directors
State University of New York at Albany - School of Business
University of Maryland - Robert H. Smith School of Business
December 9, 2005
AFA 2006 Boston Meetings Paper
This paper conducts a comprehensive analysis of the relation between the performance and governance structure of open-end, domestic-equity mutual funds during the 1985 to 2002 period. Specifically, we analyze the role of fund managers in generating portfolio performance, as well as the role of fund boards, both in the ongoing performance of the fund, and in replacing underperforming managers. We find evidence that experienced large-fund managers and managers with better track-records outperform their size, book-to-market, and momentum benchmarks, which indicates that managers play an important role in generating portfolio performance. However, we find that experienced managers of smaller funds underperform their less-seasoned counterparts, indicating the presence of managerial entrenchment in the asset-management industry. When we examine the role of boards, we find that higher numbers of independent directors predict both better future performance and a higher likelihood of underperforming manager replacement, which indicates that the structure of the board is an important determinant of governance quality. Overall, our findings add new insights to the ongoing debate on fund governance.
Number of Pages in PDF File: 44
Keywords: Mutual Funds, Investment Management, Corporate Governance
JEL Classification: G20, G34working papers series
Date posted: March 23, 2005
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