Owners as Stewards: What Determines Employee Ownership of Institutional Investment Management Firms?

Abstract

We examine how employee ownership is used to solve the agency problem between institutional investment management firms and employees. We show that employee ownership is common and the majority of firms in this industry are employee owned. We find that both firm level employee ownership and the allocation of ownership within firms are generally consistent with an optimal contracting equilibrium. Employee ownership is more common when it is less costly, more efficient, and when alternative incentives are less attractive. Also consistent with optimal contracting, we find employee ownership does not predict risk-adjusted returns. Finally, consistent with prior studies of career concerns in portfolio management, we show that portfolios managed by employee owners take significantly higher risk.

Keywords: Institutional Investment Managers, Portfolio Performance, Portfolio Management, Portfolio Managers, Optimal Contracting, Agency

JEL Classification: G1, G11, G2, G23, G3, G32