Systematic Career Concerns

Abstract

In a model where investors face uncertainty about the prevalence of skill among money managers, managers' collective performance carries information about the quality of the managerial pool. When peers perform well, investors correctly infer that even moderately-performing managers are more likely to be good, so those managers may receive net inflows despite their poorer relative performance. As investors become more optimistic about aggregate managerial ability, an average manager's willingness to hold assets that expose her to career risk increases, causing a corresponding price impact. Price impacts are largest for moderately risky assets because, unlike the safest or riskiest assets, they expose managers to state-dependent career risk.

Keywords: reputation, flight to quality, career concerns

JEL Classification: G11, G23