Mutual Funds and Bubbles: The Surprising Role of Contractual Incentives

Posted: 26 Jun 2008

See all articles by Nishant Dass

Nishant Dass

Georgia Institute of Technology - Scheller College of Business

Massimo Massa

INSEAD - Finance

Rajdeep Patgiri

BlackRock, Inc

Multiple version iconThere are 2 versions of this paper

Date Written: January 2008

Abstract

This article studies one of the potential causes of the financial market bubble of the late 1990s: the herding behavior of mutual funds. We show that the incentives contained in the mutual funds' advisory contracts induce managers to overcome their tendency to herd. We argue that investing in bubble stocks amounts to herding and contracts with high incentives induce managers to diverge from the herd, thus reducing their holding of bubble stocks. The differential exposure to bubble stocks significantly impacted the funds' performance both in the period prior to March 2000, as well as afterwards.

JEL Classification: G23, G30, G31, G32

Suggested Citation

Dass, Nishant and Massa, Massimo and Patgiri, Rajdeep, Mutual Funds and Bubbles: The Surprising Role of Contractual Incentives (January 2008). The Review of Financial Studies, Vol. 21, Issue 1, pp. 51-99, 2008. Available at SSRN: https://ssrn.com/abstract=1151572 or http://dx.doi.org/10.1093/rfs/hhm033

Nishant Dass (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

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Atlanta, GA 30308
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HOME PAGE: http://scheller.gatech.edu/dass

Massimo Massa

INSEAD - Finance ( email )

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France
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+33 1 6072 4045 (Fax)

Rajdeep Patgiri

BlackRock, Inc ( email )

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12 Throgmorton Avenue
London, EC2N 2DL
United Kingdom
+44 20 7743 1524 (Phone)

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