Institutionalization, Delegation, and Asset Prices

69 Pages Posted: 8 Aug 2018 Last revised: 5 Feb 2020

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Zhigang Qiu

Hanqing Advanced Institute of Economics and Finance, Renmin University of China

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: April 1, 2019

Abstract

We study the effects of institutionalization on fund manager compensation and asset prices. Institutionalization raises the performance-sensitive component of the equilibrium contract, which makes institutional investors effectively more risk averse. Institutionalization affects market outcomes through two opposing effects. The direct effect is to bring in more informed capital, and the indirect effect is to make each institutional investor trade less aggressively on information through affecting the equilibrium contract. When there are many institutions and little noise trading in the market, the indirect contracting effect dominates the direct informed capital effect in determining market variables such as the cost of capital, return volatility, price volatility, and market liquidity. Otherwise, the direct informed capital effect dominates.

Keywords: Institutionalization; delegation; information acquisition; agency problem; asset prices

JEL Classification: G11, G14

Suggested Citation

Huang, Shiyang and Qiu, Zhigang and Yang, Liyan, Institutionalization, Delegation, and Asset Prices (April 1, 2019). Journal of Economic Theory, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3218190 or http://dx.doi.org/10.2139/ssrn.3218190

Shiyang Huang (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Zhigang Qiu

Hanqing Advanced Institute of Economics and Finance, Renmin University of China ( email )

Room 308
Mingde Main Building, Renmin University of China
Beijing, Beijing 100872
China

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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