We use a novel dataset to study the relation between individual portfolio manager compensation and mutual fund performance. Managers with explicit performance-based pay exhibit superior subsequent fund performance, especially when investment advisors link pay to performance over a longer time period. In contrast, alternative compensation arrangements, such as fixed salary, assets-based pay, or advisor-profits-based pay are not associated with superior performance. Our tests further show that the positive relation between performance-based contracts and fund performance is not driven by the selection of talented managers proxied by education background. Lastly, managers with performance-based pay engage less in risk-shifting activities.
Portfolio manager compensation, mutual funds, fund performance, risk shifting
Finance and Financial Management | Management Sciences and Quantitative Methods
Finance Down Under 2014 Building on the Best from the Cellars of Finance, Melbourne, Australia, 2016 May 13
City or Country
MA, Linlin; YUEHUA TANG; and GOMEZ, Juan-Pedro.
Portfolio manager compensation and mutual fund performance. (2016). Finance Down Under 2014 Building on the Best from the Cellars of Finance, Melbourne, Australia, 2016 May 13. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/5169
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