The Downside of Precise Public Information for Delegated Asset Management
40 Pages Posted: 15 Oct 2013 Last revised: 22 Feb 2015
Date Written: Febuary 2015
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: Suggested Citation