Date of this Version
Review of Financial Studies
Because a money manager learns more about her skill from her management experience than outsiders can learn from her realized returns, she expects inefficiency in future contracts that condition exclusively on realized returns. A fund family that learns what the manager learns can reduce this inefficiency cost if the family is large enough. The family’s incentive is to retain any given manager regardless of her skill but, when the family has enough managers, it adds value by boosting the credibility of its retentions through the firing of others. As the number of managers grows, the efficiency loss goes to zero.
This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Financial Studies following peer review. The version of record is available online at: http://dx.doi.org/10.1093/rfs/hhi031.
Gervais, S., Lynch, A. W., & Musto, D. K. (2005). Fund Families as Delegated Monitors of Money Managers. Review of Financial Studies, 18 (4), 1139-1169. http://dx.doi.org/10.1093/rfs/hhi031
Date Posted: 27 November 2017
This document has been peer reviewed.