Network-Induced Agency Conflicts in Delegated Portfolio Management

The Accounting Review, (2021) 96 (1): 171–198.

56 Pages Posted: 7 May 2021

See all articles by Xinzi Gao

Xinzi Gao

Sun Yat-sen University (SYSU)

T.J. Wong

University of Sothern California

Lijun Xia

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Gwen Yu

University of Michigan

Date Written: January 10, 2020

Abstract

Social ties between mutual funds and the companies in which they invest (investees) can both facilitate information transfers and encourage favoritism. Using the investment choices of mutual funds in China, we compare investment performance of holdings in companies that are socially connected to mutual funds versus those that are not. We find that funds allocate more investment to connected investees’ stocks, especially when a fund is weakly monitored. This overweighting is greater in times of poor investee performance, when the benefits of additional investment to the connected investees are high. Weakly monitored funds’ preference for connected stocks hurts the returns of these funds, yielding a 6.6% lower annualized risk-adjusted return, relative to closely monitored funds. These results suggest that, absent sufficient monitoring, agency conflicts generated by social networks can dominate the information advantages of these networks.

Keywords: Mutual funds, Information asymmetry, Delegated portfolio management, Social ties

JEL Classification: G10, G11, G14

Suggested Citation

Gao, Xinzi and Wong, T.J. and Xia, Lijun and Yu, Gwen, Network-Induced Agency Conflicts in Delegated Portfolio Management (January 10, 2020). The Accounting Review, (2021) 96 (1): 171–198., Available at SSRN: https://ssrn.com/abstract=3410048

Xinzi Gao

Sun Yat-sen University (SYSU) ( email )

135, Xingang Xi Road
Haizhu District
Guangzhou, Guangdong 510275
China

T.J. Wong

University of Sothern California ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Lijun Xia

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

Room 723, Antai Building, 1954 Huashan Rd.
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

Gwen Yu (Contact Author)

University of Michigan ( email )

701 Tappan Street
R3350
Ann Arbor, MI MI 48109
United States
7347635934 (Phone)

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