Do Incentives Matter? Managerial Contracts for Dual-Purpose Funds

Posted: 20 Mar 2000

See all articles by Michael L. Lemmon

Michael L. Lemmon

University of Utah - Department of Finance

Jim Schallheim

University of Utah - Department of Finance

Jaime F. Zender

University of Colorado at Boulder - Department of Finance

Abstract

We examine the contracts used to compensate the managers of the seven dual-purpose investment companies that existed between 1967 and 1985 to determine whether financial incentives influence real behavior in the predicted way. The compensation contracts for these funds provided explicit incentives for the production of both capital gains and current income. We model the behavior that an expected compensation-maximizing agent would exhibit when faced with such contracts and derive several testable implications. Our empirical results are consistent with the theoretical predictions, and so we are able to use this relatively clean setting to contribute to the growing literature concerned with determining the impact of incentive contracts on behavior. A unique and interesting aspect of this study is that the nature of these organizations allows us to provide evidence that the market understood and priced the behavior induced by these contracts.

JEL Classification: J41, J44

Suggested Citation

Lemmon, Michael L. and Schallheim, James S. and Zender, Jaime F., Do Incentives Matter? Managerial Contracts for Dual-Purpose Funds. Journal of Political Economy, Vol. 108, No. 2, April 2000. Available at SSRN: https://ssrn.com/abstract=212925

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

James S. Schallheim (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-581-4434 (Phone)
801-581-7214 (Fax)

Jaime F. Zender

University of Colorado at Boulder - Department of Finance ( email )

Boulder, CO 80309
United States
303-554-1665 (Phone)
303-492-4689 (Fax)

HOME PAGE: http://www-bus.colorado.edu/faculty/Zender/

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