72 Pages Posted: 18 Mar 2012 Last revised: 14 May 2016
Date Written: May 13, 2016
We use a novel dataset to study the relation between individual portfolio manager compensation and mutual fund performance. Managers with explicit performance-based pay exhibit superior subsequent fund performance, especially when investment advisors link pay to performance over a longer time period. In contrast, alternative compensation arrangements, such as fixed salary, assets-based pay, or advisor-profits-based pay are not associated with superior performance. Our tests further show that the positive relation between performance-based contracts and fund performance is not driven by the selection of talented managers proxied by education background. Lastly, managers with performance-based pay engage less in risk-shifting activities.
Keywords: Portfolio manager compensation, mutual funds, fund performance, risk shifting
JEL Classification: G23, J33
Suggested Citation: Suggested Citation
Ma, Linlin and Tang, Yuehua and Gomez, Juan-Pedro, Portfolio Manager Compensation and Mutual Fund Performance (May 13, 2016). Finance Down Under 2014 Building on the Best from the Cellars of Finance. Available at SSRN: https://ssrn.com/abstract=2024027 or http://dx.doi.org/10.2139/ssrn.2024027