The Leadership Effect: Evidence from the Fund Industry
44 Pages Posted: 20 Sep 2022 Last revised: 23 Sep 2022
Date Written: August 15, 2021
The literature debates whether vertical (autocratic) or horizontal (democratic) policy making is better for institutional and country development. We approach this issue by examining how decision-making hierarchy in team-managed U.S. equity mutual funds affects their performance and risk taking. Employing a unique hand-collected dataset, we find that vertically-managed funds with lead managers earn 75 bps per year lower Fama-French five-factor alpha than their horizontally-managed counterparts. Moreover, vertically-managed funds hold less concentrated portfolios and have lower residual risk, thus showing signs of inferior security selection ability. Our findings support a horizontal decision-making structure in organizations functioning in an uncertain expectation environment.
Keywords: Fund alpha, Portfolio concentration, Risk-taking behaviour, Team management
JEL Classification: D70, G23, P00
Suggested Citation: Suggested Citation