Mutual Funds and Bubbles: The Surprising Role of Contractual Incentives

66 Pages Posted: 25 Jul 2005

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Nishant Dass

Georgia Institute of Technology - Scheller College of Business

Rajdeep Patgiri

BlackRock, Inc

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

Abstract

This paper studies one of the potential causes of the financial market bubble of the late 1990s: herding behavior of mutual funds. We show that the incentives contained in the mutual funds' advisory contracts induce managers to overcome their tendency to herd. We argue that investing in bubble stocks amounts to herding and contracts with high incentives induce managers to diverge from the herd, thus reducing their holding of bubble stocks. The differential exposure to bubble stocks significantly impacted the funds' performance both in the period prior to March 2000 as well as afterwards.

Keywords: Bubbles, mutual funds, compensation, herding, agency

JEL Classification: G23, G30, G31, G32

Suggested Citation

Massa, Massimo and Dass, Nishant and Patgiri, Rajdeep, Mutual Funds and Bubbles: The Surprising Role of Contractual Incentives (November 2006). Available at SSRN: https://ssrn.com/abstract=759365 or http://dx.doi.org/10.2139/ssrn.759365

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Nishant Dass

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5109 (Phone)

HOME PAGE: http://scheller.gatech.edu/dass

Rajdeep Patgiri (Contact Author)

BlackRock, Inc ( email )

Drapers Gardens
12 Throgmorton Avenue
London, EC2N 2DL
United Kingdom
+44 20 7743 1524 (Phone)

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