Outsourcing Mutual Fund Management: Firm Boundaries, Incentives and Performance

58 Pages Posted: 19 Mar 2006 Last revised: 30 Aug 2012

Joseph Chen

University of California, Davis - Graduate School of Management

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Wenxi Jiang

CUHK Business Schoold

Jeffrey D. Kubik

Syracuse University - Department of Economics

Date Written: August 29, 2012

Abstract

We investigate the effects of managerial outsourcing on the performance and incentives of mutual funds. Fund families outsource the management of a large fraction of their funds to advisory firms. These funds under-perform those ran internally by about 50 basis points per year. After instrumenting for a fund's outsourcing status, the estimate of under-performance is three times larger. We hypothesize that contractual externalities due to firm boundaries make it difficult to extract performance from an outsourced relationship. Consistent with this view, an outsourced fund faces higher-powered incentives; they are more likely to be closed after poor performance and excessive risk-taking.

Suggested Citation

Chen, Joseph and Hong, Harrison G. and Jiang, Wenxi and Kubik, Jeffrey D., Outsourcing Mutual Fund Management: Firm Boundaries, Incentives and Performance (August 29, 2012). Available at SSRN: https://ssrn.com/abstract=891573 or http://dx.doi.org/10.2139/ssrn.891573

Joseph S. Chen

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Wenxi Jiang

CUHK Business Schoold ( email )

Room 1250, Cheng Yu Tung Building
Chinese University of Hong Kong
Shatin, NT 06520
Hong Kong

Jeffrey D. Kubik

Syracuse University - Department of Economics ( email )

426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-9063 (Phone)
315-443-1081 (Fax)

Paper statistics

Downloads
839
Rank
21,336
Abstract Views
4,071