Managerial Structure and Performance-Induced Trading

Abstract

We propose a new channel through which teamwork improves mutual fund activity: by offsetting individual overconfidence, teams mitigate excessive performance-induced trading. The predictions of our theoretical model are confirmed in the data. Team-managed funds trade less after good performance than single-managed funds, and the magnitude of this differential increases with team size. Moreover, changes from single-to team-management correspond to lower performance-induced trading. Our results cannot be explained by alternative explanations, including manager experience, gender, and fund flows. Heavy trading by singe-managed funds results in lower next-period returns compared to team-managed funds. Our findings indicate that team-management reduces overconfident trading.

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

JEL Classification: D22; D70; G02; G23