Allocation of Decision Rights and the Investment Strategy of Mutual Funds

46 Pages Posted: 19 Mar 2012  

Nishant Dass

Georgia Institute of Technology - Scheller College of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Qinghai Wang

University of Central Florida - College of Business Administration

Date Written: March 15, 2012

Abstract

The literature suggests that while decentralized decision-making can allow for greater specialization in an organization, it heightens the cost of coordinating decisions. The mutual fund industry – in particular, sole- and team-managed balanced funds – provides an ideal setting to test the specialization vs. coordination trade-off, since information on decision structures and fund actions is easily obtained. We document that sole-managed balanced funds, with centralized decision rights, exhibit significant market timing that requires reallocation across asset classes. However, consistent with coordination difficulties between managers specializing in particular asset classes, there is no market-timing evident in team-managed balanced funds. Team-managed funds exhibit greater returns from specialization, in the form of better security-selection performance than sole-managed funds. These results hold cross-sectionally and for funds that switch management structures. The overall returns across different management structures are similar, indicating a market equilibrium. Investor flows reward market-timing performance for sole- but not team-managed funds.

Keywords: teams, coordination costs, decision rights, performance, mutual funds

JEL Classification: G20, G23, D70

Suggested Citation

Dass, Nishant and Nanda, Vikram K. and Wang, Qinghai, Allocation of Decision Rights and the Investment Strategy of Mutual Funds (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2024370 or http://dx.doi.org/10.2139/ssrn.2024370

Nishant Dass (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5109 (Phone)

HOME PAGE: http://scheller.gatech.edu/dass

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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