Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry

41 Pages Posted: 20 Mar 2005

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Joost Driessen

Tilburg University - Center and Faculty of Economics and Business Administration; Tilburg University - Center for Economic Research (CentER)

Pascal J. Maenhout

INSEAD - Finance

David Weinbaum

Syracuse University

Date Written: December 2006

Abstract

We use a unique database on the ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. We find that the ownership stakes of both independent and non-independent directors play an economically substantial and statistically significant role. Specifically, funds in which directors have low ownership stakes, or “skin in the game”, significantly underperform. We posit two economic mechanisms to explain this relation. First, a lack of ownership could lead directors to be less active monitors, increasing agency costs between fund shareholders and fund managers. Second, directors may have superior private information on future mutual fund performance, choosing not to invest in those funds that they expect to underperform. We find evidence in support of the monitoring mechanism and against the private information mechanism. In particular, we find no evidence that directors are able to avoid funds that underperform. Finally, our results cannot be explained by the previously documented relation between fund governance and mutual fund fees.

Suggested Citation

Cremers, K. J. Martijn and Driessen, Joost and Maenhout, Pascal J. and Weinbaum, David, Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry (December 2006). Yale ICF Working Paper No. 06-34. Available at SSRN: https://ssrn.com/abstract=686167

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Joost Driessen

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Pascal J. Maenhout

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

David Weinbaum

Syracuse University ( email )

Syracuse, NY
United States

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