Do Funds Need Governance? Evidence from Variable Annuity-Mutual Fund Twins

Fisher College of Business Working Paper No. 2007-03-18

Charles A. Dice Center Working Paper No. 2007-17

40 Pages Posted: 25 Mar 2008 Last revised: 22 Sep 2010

See all articles by Richard B. Evans

Richard B. Evans

University of Virginia - Darden School of Business

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Date Written: November 5, 2007

Abstract

We study the roles of traditional governance (boards, sponsors, etc.) and market governance(investors voting with their feet) in mutual funds and variable annuities. We find that market governance is less pronounced for variable annuity investors. Using a matched sample of variable annuity-mutual fund twins, we find that variable annuity investors are less sensitive to poor performance and high fees than mutual fund investors. Given the weaker role played by market governance, we then examine the role played by traditional governance in variable annuities. Variable annuity boards and sponsors add alternative investment options and replace advisors on behalf of their investors after poor performance and high fees. These traditional governance mechanisms are, however, less effective when conflicts of interest exist between variable annuity sponsors and fund advisors.

Keywords: Governance, Mutual funds, Variable annuities, Board of Directors, Performance sensitivity

JEL Classification: G22, G34

Suggested Citation

Evans, Richard B. and Fahlenbrach, Rüdiger, Do Funds Need Governance? Evidence from Variable Annuity-Mutual Fund Twins (November 5, 2007). Fisher College of Business Working Paper No. 2007-03-18, Charles A. Dice Center Working Paper No. 2007-17, Available at SSRN: https://ssrn.com/abstract=1030022 or http://dx.doi.org/10.2139/ssrn.1030022

Richard B. Evans

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Rüdiger Fahlenbrach (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny
Extranef 211
1015 Lausanne, CH-1015
Switzerland
++41-21-693-0098 (Phone)
++41-21-693-3010 (Fax)

HOME PAGE: http://https://www.epfl.ch/labs/sfi-rf/

Swiss Finance Institute

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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