Portfolio manager compensation and mutual fund performance

• Main Authors: MA, Linlin, YUEHUA TANG, GOMEZ, Juan-Pedro
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2016
• Subjects: Portfolio manager compensation; mutual funds; fund performance; risk shifting; Finance and Financial Management; Management Sciences and Quantitative Methods
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5169; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6168/viewcontent/SSRN_id2024027.pdf
• Institution: Singapore Management University

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.