Long-Term Investing as an Agency Problem

13 Pages Posted: 1 Oct 2015 Last revised: 19 Mar 2017

See all articles by David Neal

David Neal

Future Fund

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Date Written: July 1, 2015

Abstract

The agency problems that pervade delegated investment management are exacerbated when investing for the long term, where the payoff is distant and often highly uncertain. These conditions compound the difficulty of aligning and monitoring the agents (managers) responsible for making investment decisions, particularly across multi-layered investment organizations. Problems arise from differences in investment horizons; the tendency to evaluate and reward based on short-term results; and failure to commit. We delve into these issues, and offer some solutions. Investment organizations intending to pursue long-term investing should aim to create an environment where all principals and agents along the chain of delegations are aligned, engaged on an ongoing basis, incentivized to work towards long-term outcomes, and committed to investing for the long run.

Suggested Citation

Neal, David and Warren, Geoffrey J., Long-Term Investing as an Agency Problem (July 1, 2015). CIFR Paper No. 063/2015. Available at SSRN: https://ssrn.com/abstract=2667285 or http://dx.doi.org/10.2139/ssrn.2667285

David Neal

Future Fund ( email )

United States

Geoffrey J. Warren (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

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