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Delegated Portfolio Management and Rational Prolonged Mispricing

Posted: 15 Jul 2002  

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance

Steve L. Slezak

University of Cincinnati - Department of Finance - Real Estate

Abstract

This paper examines how information becomes reflected in prices when investment decisions are delegated to fund managers whose tenure may be shorter than the time it takes for their private information to become public. We consider a sequence of managers, where each subsequent manager inherits the portfolio of their predecessor. We show that the inherited portfolio distorts the subsequent manager's incentive to trade on long-term information. This allows erroneous past information to persist, causing mispricing similar to a bubble. We investigate the magnitude of the mispricing. In addition, we examine endogenous information quality. In some cases, information quality increases when the manager's expected tenure decreases.

Keywords: mispricing, fund managers, bubbles

JEL Classification: D8, G14

Suggested Citation

Goldman, Eitan and Slezak, Steve L., Delegated Portfolio Management and Rational Prolonged Mispricing. Journal of Finance, Vol. 58, pp. 283-311, 2003. Available at SSRN: https://ssrn.com/abstract=312405

Eitan Goldman (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)

Steve L. Slezak

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

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