Career Risk and Market Discipline in Asset Management
70 Pages Posted: 19 Nov 2018
Date Written: July 30, 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 coupled with a significant loss in imputed compensation. Scarring effects are absent when liquidations are preceded by normal relative performance or involve mid-level employees. Seen through the lens of a model with moral hazard and adverse selection, 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 eects
JEL Classification: G20, G23, J24, J62, J63
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