Portfolio Manager Compensation and Mutual Fund Performance

72 Pages Posted: 18 Mar 2012 Last revised: 14 May 2016

Linlin Ma

Northeastern University

Yuehua Tang

University of Florida - Department of Finance

Juan-Pedro Gomez

IE Business School

Date Written: May 13, 2016

Abstract

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

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

Linlin Ma

Northeastern University ( email )

Boston, MA 02115
United States
617-373-4569 (Phone)

Yuehua Tang (Contact Author)

University of Florida - Department of Finance ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/yuehuatang

Juan-Pedro Gomez

IE Business School ( email )

Maria de Molina 12
Madrid, 28006
Spain
34 91 7821326 (Phone)
34 91 7454762 (Fax)

HOME PAGE: http://juanpedrogomez.profesores.ie.edu/

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