Why Constrain Your Mutual Fund Manager?

72 Pages Posted: 23 Aug 2001

See all articles by Andres Almazan

Andres Almazan

University of Texas at Austin - Department of Finance

Keith C. Brown

University of Texas at Austin - Department of Finance

Murray Carlson

University of British Columbia (UBC) - Sauder School of Business

David A. Chapman

McIntire School, University of Virginia

Date Written: December 18, 2002

Abstract

We examine the form, adoption rates, and economic rationale for the investment restrictions found in the contracts between mutual fund investors and managers. Based on a sample of U.S. domestic equity funds from 1994 to 2000, we find systematic patterns in the use of policy constraints that are consistent with an optimal contracting view of the fund industry. In particular, restrictions are more frequently present when it is relatively less beneficial to use direct methods to monitor manager behavior, including when (i) boards contain a higher proportion of inside directors, (ii) the portfolio manager is more experienced, (iii) the fund is managed by a team rather than an individual, and (iv) the fund does not belong to a large organizational complex. We find no evidence that low- and high-constraint funds produce different risk-adjusted returns, which is also consistent with the existence of a contracting equilibrium.

Keywords: Mutual Funds, Corporate Governance, Financial Contracting

JEL Classification: G23, G34

Suggested Citation

Almazan, Andres and Brown, Keith C. and Carlson, Murray D. and Chapman, David A., Why Constrain Your Mutual Fund Manager? (December 18, 2002). Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=280999 or http://dx.doi.org/10.2139/ssrn.280999

Andres Almazan

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-4368 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/dept/finance/faculty/profiles/index.asp?addTarget=4

Keith C. Brown

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6520 (Phone)
512-471-5073 (Fax)

Murray D. Carlson

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8358 (Phone)

David A. Chapman (Contact Author)

McIntire School, University of Virginia ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

HOME PAGE: http://https://sites.google.com/site/davidchapmanswebsite/

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