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Portfolio Pumping, Trading Activity and Fund Performance
Sugato Bhattacharyya University of Michigan - Stephen M. Ross School of Business; National University of Singapore Vikram K. Nanda Georgia Institute of Technology - College of Management July 2009 Abstract: We develop a model of trading by an informed fund manager compensated on the basis of her fund's Net Asset Value (NAV) and show that she has an incentive to pump her portfolio by buying securities already held by her fund. Such portfolio pumping leads to excessive trading and diminished long-term fund performance. Portfolio pumping also introduces an upward bias in measured NAVs and contributes to the closed-end fund discount. Despite such costs, it may be optimal to base fund manager compensation on NAV in order to incentivize her to trade more aggressively.
Keywords: mutual fund, managerial incentives, trading JEL Classifications: G20, D82, L20 Working Paper SeriesDate posted: July 17, 2006 ; Last revised: June 30, 2009Suggested CitationContact Information
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