Betting on the CEO

Abstract

We study the extent to which active mutual funds bet on the CEO. We find unusual trading and exit rates in a CEO turnover month, particularly for raided CEOs, consistent with larger bets being placed on talented CEOs. Some funds persistently bet (not bet) on the CEO – the jockey (horse) strategy. The former funds are less likely to be team-managed and they tilt towards human-capital intensive industries. They charge higher fees, but despite that, their net returns are similar. We finally show that these opposing strategies can coexist in equilibrium where investors disagree about the importance of the CEO.

Keywords: Active mutual funds, CEO turnover, CEO ability

JEL Classification: G11, G23, G34