Managing Other People's Money: An Agency Theory in Financial Management Industry
49 Pages Posted: 31 Aug 2020 Last revised: 9 Mar 2023
Date Written: January 26, 2023
We build an active asset management model to study the interplay between the
career concerns of a manager and the prevailing market conditions. We show that fund
managers over-invest in market neutral strategies, as these have a reputational benefit.
This benefit is smaller in bull markets, when investors expect more managers to use
high beta strategies, making their performance less informative about their ability than
in bear markets. Consequently, flows of funds that follow high beta strategies are less
responsive to the fund’s performance and the flow-performance sensitivity is higher in
bear than in bull markets.
Keywords: Mutual Funds, Fund Flows, Bayesian Learning, Competition
JEL Classification: G11, G23
Suggested Citation: Suggested Citation