Compensating Power: An Analysis of Rents and Rewards in the Mutual Fund Industry

65 Pages Posted: 18 Apr 2007 Last revised: 13 Oct 2008

William A. Birdthistle

Chicago-Kent College of Law - Illinois Institute of Technology

Abstract

The allegations of malfeasance in the investment management industry - market timing, late trading, revenue sharing, and several others - involve a broad range of mutual fund operations. This Article seeks to explain the common source of these irregularities by focusing upon a trait they share: the practice of investment advisers' capitalizing upon their managerial influence to increase assets under management in order to generate greater fees from those assets.

This Article extends theories of executive compensation into the context of investment management to understand the extraction of rents by mutual fund advisers. Investment advisers, as collective groups of portfolio managers, interact with the boards of trustees of mutual funds in ways analogous to the dealings of business executives with corporate boards of directors. In this setting, the managerial power hypothesis of executive compensation provides a useful paradigm for understanding distortions in arm's-length bargaining between investment advisers and fund boards, as well as limitations of the market's ability to ensure optimal contracting between those parties.

Keywords: mutual fund, investment adviser, investment management, executive compensation, optimal contracting, managerial power, Bebchuk, fund, corporate governance, board of trustees, board

JEL Classification: A10, G30, G20, G34

Suggested Citation

Birdthistle, William A., Compensating Power: An Analysis of Rents and Rewards in the Mutual Fund Industry. Tulane Law Review, Vol. 80, pp. 1401-1465, 2006. Available at SSRN: https://ssrn.com/abstract=979327

William A. Birdthistle (Contact Author)

Chicago-Kent College of Law - Illinois Institute of Technology ( email )

565 W. Adams St.
Chicago, IL 60661-3691
United States

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