Managerial Structure and Performance-Induced Trading

Abstract

We propose a new channel through which teamwork improves mutual fund activity: by offsetting individual manager overconfidence, teams mitigate excessive performance-induced trading (PIT). The predictions of our theoretical mechanism are confirmed in the data. Team-managed funds trade less after good performance than single-managed funds, and this differential increases with team size. Moreover, changes from single to team management correspond to reductions in PIT. We rule out a number of alternative explanations, including differences in manager skill, manager experience, fund governance, gender, and fund flows. Overconfident trading by single-managed funds results in lower next-period returns compared to team-managed funds. Our findings indicate that team management reduces uninformed overconfident trading.

Keywords: Behavioral bias, Excess turnover, Fund alpha, Portfolio optimization, Posterior belief

JEL Classification: D22, D70, G02, G23