The Downside of Precise Public Information for Delegated Asset Management

40 Pages Posted: 15 Oct 2013 Last revised: 22 Feb 2015

See all articles by Jason Donaldson

Jason Donaldson

Washington University in St. Louis

Giorgia Piacentino

Columbia University

Date Written: Febuary 2015

Abstract

We theoretically investigate the effect of public information — such as credit ratings and securities analysts’ reports — on investor welfare in the context of delegated asset management. Specifically, we ask: does more precise public information increase investor welfare by decreasing an asset manager’s informational advantage and, thereby, mitigating the agency problem between him and his client? We show, first, that public information does not align incentives and, second, that decreasing the precision of the information is Pareto improving. Interpreting public information as credit ratings, this suggests that widening ratings categories makes everyone better off. Our results are consistent with some empirical facts about asset management fees.

Keywords: Credit Ratings, Delegated Portfolio Management, Optimal Contracting, Investment Mandates

JEL Classification: G11, G23, G18, D86, D82

Suggested Citation

Donaldson, Jason and Piacentino, Giorgia, The Downside of Precise Public Information for Delegated Asset Management (Febuary 2015). Available at SSRN: https://ssrn.com/abstract=2340240 or http://dx.doi.org/10.2139/ssrn.2340240

Jason Donaldson

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

Giorgia Piacentino (Contact Author)

Columbia University ( email )

New York

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