Reputation Concerns and Slow-Moving Capital
41 Pages Posted: 30 Oct 2008 Last revised: 24 Mar 2021
Date Written: March 24, 2021
We analyze fund managers' reputation concerns in an equilibrium model, tying together a number of seemingly unrelated phenomena. The model implies that, due to reputation concerns, hedge fund managers --- especially those with average reputation levels --- prefer strategies with negatively skewed return distributions. One subtle consequence of this preference is that capital sometimes appears slow moving, leaving profitable investment opportunities unexploited, yet other times appears fast moving, causing large capital relocation and price fluctuations in the absence of fundamental news. More broadly, the analysis demonstrates a limitation of market discipline: fund managers may distort their investments precisely because of market discipline.
Keywords: Reputation, Slow-moving capital, Career concern
JEL Classification: G11, G23
Suggested Citation: Suggested Citation