Labor Mobility and Capital Misallocation in the Mutual Fund Industry

Abstract

If investors’ capital won’t come to fund managers, then fund managers will go to capital. I document that fund managers move across mutual fund firms to manage amounts of assets that better match their skills, which improves the allocative efficiency of capital across fund managers. For causal identification, I exploit exogenous shocks to fund managers’ ability to switch firms due to state-level changes to non-compete laws. In states that strengthen the enforceability of non-compete agreements, the propensity of fund managers to switch mutual fund firms is halved, capital misallocation across managers increases by about 10%, and the monthly total value added of managers declines by over $25 million. These results indicate that fund managers’ mobility across firms plays an important role in the efficient reallocation of capital in the mutual fund industry.

Keywords: Mutual Funds, Capital Misallocation, Labor Mobility, Non-Competes

JEL Classification: G20, G23, G30, G38, J08, K31