Delegated Asset Management, Investment Mandates, and Capital ImmobilityZhiguo He, Wei Xiong
NBER Working Paper No. 14574 This paper develops a model to explain the widely used investment mandates in the institutional asset management industry based on two insights: First, giving a manager more investment flexibility weakens the link between fund performance and his effort in the designated market, and thus increases agency cost. Second, the presence of outside assets with negatively skewed returns can further increase the agency cost if the manager is incentivized to pursue outside opportunities. These effects motivate narrow mandates and tight tracking error constraints to most fund managers except those with exceptional talents. Our model sheds light on capital immobility and market segmentation that are widely observed in financial markets, and highlights important effects of negatively skewed risk on institutional incentive structures.
Machine-readable bibliographic record - MARC, RIS, BibTeX Document Object Identifier (DOI): 10.3386/w14574 Users who downloaded this paper also downloaded* these:
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