Mutual Fund Performance and Governance Structure: The Role of Portfolio Managers and Boards of Directors

59 Pages Posted: 30 Jan 2013 Last revised: 13 Feb 2014

See all articles by Bill Ding

Bill Ding

Zhejiang University

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: June 15, 2012

Abstract

This paper conducts a comprehensive analysis of the relation between the performance and governance structure of open-end, domestic-equity mutual funds during the 1985 to 2002 period. We show that experienced large-fund portfolio managers outperform their size, book-to-market, and momentum benchmarks, but that experienced small-fund portfolio managers underperform their benchmarks — indicating the presence of managerial entrenchment in the mutual fund industry. When we examine the role of fund boards, we find that independent directors are crucial for terminating underperforming seasoned portfolio managers, as outflows are not sufficient to pressure the management company to do so. In fact, our evidence indicates that independent boards impact pre-expense performance much more significantly than their prior-documented impact on fund fees. We also find a role for internal governance: inside directors and large management company complexes appear to better monitor performance due to “hidden actions,” as well as terminating underperforming inexperienced managers.

Keywords: governance of asset management institutions, mutual fund boards, portfolio manager disciplinary mechanisms

JEL Classification: G12, G23

Suggested Citation

Ding, Bill and Wermers, Russell R., Mutual Fund Performance and Governance Structure: The Role of Portfolio Managers and Boards of Directors (June 15, 2012). Available at SSRN: https://ssrn.com/abstract=2207229 or http://dx.doi.org/10.2139/ssrn.2207229

Bill Ding

Zhejiang University

1 Xuefu Road
Ningbo, Zhejiang 315100
China

Russell R. Wermers (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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