Portfolio Performance and Agency

Dybvig, Philip H.; Farnsworth, Heber; Carpenter, Jennifer N.

doi:hhp056

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Portfolio Performance and Agency

The Review of Financial Studies, Vol. 23, Issue 1, pp. 1-23, 2009

Posted: 25 Jan 2010

See all articles by Philip H. Dybvig

Philip H. Dybvig

Washington University in St. Louis - John M. Olin Business School

Jennifer N. Carpenter

New York University (NYU) - Department of Finance

There are 5 versions of this paper

Date Written: September 2009

Abstract

In this paper we analyze the optimal contract for a portfolio manager who can exert effort to improve the quality of a private signal about future market prices. We assume complete markets over states distinguished by asset payoffs and place no restrictions on the form of the contract. We show that trading restrictions are essential because they prevent the manager from undoing the incentive effects of performance-based fees. We provide conditions under which simple benchmarking emerges as optimal compensation. Additional incentives to take risk are necessary when information can be manipulated or else the manager will understate information to offset the benchmarking.

Keywords: D82, G11

Suggested Citation: Suggested Citation

Dybvig, Philip H. and Farnsworth, Heber and Carpenter, Jennifer N., Portfolio Performance and Agency (September 2009). The Review of Financial Studies, Vol. 23, Issue 1, pp. 1-23, 2009, Available at SSRN: https://ssrn.com/abstract=1541003 or http://dx.doi.org/hhp056