How disclosure impacts monitoring spillovers between competing asset managers

Abstract

We examine how disclosure affects monitoring spillovers between competing asset managers. In our model, uninformed funds and informed funds use fees and monitoring capacities to compete with each other over fund flows from a set of heterogeneous risk-averse investors. We provide conditions for when uninformed and informed 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. Disclosure of the informed fund's holdings facilitates monitoring complementarities across funds, above and beyond disclosure providing information to investors and firms. Moreover, we show that better information about portfolio firms' cash flows may either increase or decrease monitoring. The net effect depends on whether the dominating effect of disclosure involves reducing the informed fund's information advantage or a general reduction in uncertainty about firms' cash flows.

Keywords: Active funds; Passive funds; Competition; Corporate governance; Disclosure

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