Career Risk and Market Discipline in Asset Management
66 Pages Posted: 21 Nov 2017 Last revised: 13 Apr 2018
Date Written: April 2018
We establish that the labor market helps discipline asset managers via the impact of fund liquidations on their careers. Using hand-collected data on 1,948 professionals, we find that top managers working for funds liquidated after persistently poor relative performance suffer demotion entailing a yearly average compensation loss of $664,000. Scarring effects are absent when liquidations are preceded by normal performance or involve mid-level employees. Based on a model with moral hazard and adverse selection, we find that these results can be ascribed to reputation loss rather than bad luck. The findings suggest that performance-induced liquidations supplement compensation-based incentives.
Keywords: Careers, Hedge Funds, Asset Managers, Market Discipline, Scarring Effects
JEL Classification: G20, G23, J24, J62, J63
Suggested Citation: Suggested Citation