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
Date Written: June 15, 2012
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: Suggested Citation