Reputation and performance fee effects on portfolio choice by investment advisers

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20 Scopus citations

Abstract

This paper examines a two-period model of investment management. Investors reallocate their wealth between two mutual funds managed by different investment advisers after observing the performance of each adviser in the first period. A reputation effect causes one adviser to choose a portfolio in the first period that is extreme given his private information about asset returns. Extreme portfolios are costly for risk-averse advisers and investors because mutual funds are riskier than in one-period or single-adviser settings. Adoption of a performance fee mitigates undesirable reputation effects and results in superior ex ante payoffs to investors.

Original languageEnglish (US)
Pages (from-to)227-271
Number of pages45
JournalJournal of Financial Markets
Volume2
Issue number3
DOIs
StatePublished - Aug 1999

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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