Outsourcing Mutual Fund Management: Firm Boundaries, Incentives and Performance
University of California, Davis - Graduate School of Management
Harrison G. Hong
Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)
Yale University - School of Management
Jeffrey D. Kubik
Syracuse University - Department of Economics
August 29, 2012
We investigate the effects of managerial outsourcing on the performance and incentives of mutual funds. Fund families outsource the management of a large fraction of their funds to advisory firms. These funds under-perform those ran internally by about 50 basis points per year. After instrumenting for a fund's outsourcing status, the estimate of under-performance is three times larger. We hypothesize that contractual externalities due to firm boundaries make it difficult to extract performance from an outsourced relationship. Consistent with this view, an outsourced fund faces higher-powered incentives; they are more likely to be closed after poor performance and excessive risk-taking.
Number of Pages in PDF File: 58
Date posted: March 19, 2006 ; Last revised: August 30, 2012
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