How portfolio disclosure impacts monitoring spillovers between competing asset managers

Abstract

Fund managers can monitor portfolio firms to improve returns, but their incentives to engage depend on other investors' monitoring, e.g., via free riding or collaboration. In this paper, we examine how portfolio disclosure affects monitoring spillovers between competing asset managers. In our model, informed and uninformed funds use monitoring investments to compete with each other over fund flows from investors. We provide conditions for when informed and uninformed fund monitoring are strategic complements, leading to monitoring of the same firms, or strategic substitutes, leading to monitoring of different firms. We then highlight several disclosure implications of our model. Interestingly, disclosure of the informed fund's holdings facilitates monitoring complementarities across funds, above and beyond disclosure providing information to investors and firms. Overall, our results inform the debate on asset managers' incentives to invest in monitoring, and highlight the key role played by portfolio disclosure.

Keywords: Asset managers, Competition, Corporate governance, Portfolio disclosure, Monitoring

JEL Classification: D4, G23, G34, K22, M41