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Cross-Subsidization in Institutional Asset Management Firms

The Review of Financial Studies

59 Pages Posted: 19 Mar 2012 Last revised: 23 May 2017

Ranadeb Chaudhuri

Oakland University

Zoran Ivkovich

Michigan State University, Department of Finance

Charles Trzcinka

Indiana University - Kelley School of Business - Department of Finance

Date Written: May 10, 2017

Abstract

We identify strong and robust evidence of strategic performance allocation in the institutional money management industry, directed toward strong recent performers. The extent of strategic performance allocation varies with the product’s client power. Strategic performance allocation is particularly pronounced for young products. Studying variation in opportunities for strategic performance allocation (illiquidity of the products’ investment styles and cross-trading status of the firm) enables us to show that (at least part of) strategic performance allocation rests upon cross-subsidization. We also quantify, and assess the implications of, strategic performance allocation away from the products that likely cross-subsidize this performance.

Keywords: money management, strategic performance allocation, agency issues

JEL Classification: G20, G23

Suggested Citation

Chaudhuri, Ranadeb and Ivkovich, Zoran and Trzcinka, Charles, Cross-Subsidization in Institutional Asset Management Firms (May 10, 2017). The Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2024290 or http://dx.doi.org/10.2139/ssrn.2024290

Ranadeb Chaudhuri (Contact Author)

Oakland University ( email )

320 Eliott Hall
Rochester, MI 48309
United States

Zoran Ivkovich

Michigan State University, Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Charles Trzcinka

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-9908 (Phone)
812-855-5875 (Fax)

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