Labor Mobility and Capital Misallocation in the Mutual Fund Industry

Abstract

This paper studies how fund managers' mobility across mutual fund firms affects the efficiency in the allocation of capital across managers. To overcome the endogeneity of fund managers' mobility, I exploit exogenous shocks to managers' ability to change employer via state-level legislation changes increasing the enforceability of non-compete agreements. I find that these policy changes lead to a reduction by half of the propensity of fund managers to switch mutual fund firms along with an increase in capital misallocation across managers by roughly 30% as well as a decline in value added of managers by more than $110 million at the state level. These results suggest that the labor market for mutual fund managers is an important channel through which the mismatch between capital and skill is reduced.

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

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