Managerial Structure and Performance-Induced Trading

Abstract

The literature finds that investors increase portfolio turnover following high returns, explaining it by either overconfidence or skilled trading. This paper develops a theoretical model and shows empirically that team-managed funds trade less after good performance than single-managed funds. The magnitude of this differential increases with team size. Moreover, the change from single- to team-management structure decreases overconfidence induced trading. In spite of more trading, the next-period risk-adjusted returns of single-managed funds are no better than those of team-managed funds. These findings indicate that team-management reduces overconfident trading. Alternative channels cannot explain the drop in excessive trading in team-managed funds.

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

JEL Classification: D22; D70; G02; G23