The Impact of Competition on Manager Compensation: Theory and Evidence in Hedge Funds

54 Pages Posted: 20 Oct 2008 Last revised: 15 Feb 2010

See all articles by Fei Pan

Fei Pan

Purdue University - Krannert School of Management

Hui Zhao

affiliation not provided to SSRN

Kwei Tang

Purdue University - Krannert School of Management

Date Written: November 2009

Abstract

The hedge fund (HF) industry has experienced dramatic changes since late 2007. Before then, HF managers faced little or no competition because of affluent capital in the market. Since then, however, large redemption because of the financial crisis has forced managers to compete for capital, leading to a transfer of bargaining power in managers' compensation contracts from the managers to the investors. In this paper, we investigate the impact of competition on managers' compensation using a signaling game model. We show that, when the bargaining power is on the investors' side, managers are less willing to offer a high-water mark. These findings are further validated in an empirical study.

Keywords: Competition, Hedge funds, High-water mark, Asymmetric information

JEL Classification: C7, D8, G1, G2

Suggested Citation

Pan, Fei and Zhao, Hui and Tang, Kwei, The Impact of Competition on Manager Compensation: Theory and Evidence in Hedge Funds (November 2009). Available at SSRN: https://ssrn.com/abstract=1285788 or http://dx.doi.org/10.2139/ssrn.1285788

Fei Pan (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

HOME PAGE: http://panfei.googlepages.com

Hui Zhao

affiliation not provided to SSRN ( email )

Kwei Tang

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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