Asset Management
Session Chair: Min Zhu, University of Queensland
Career Concerns, Short-Termism, and Real Options: The Case of Delegated Money Management
Jules van Binsbergen; The Wharton School
Jungsuk Han; Seoul National University
Hongxun Ruan; Peking University
Ran Xing; Stockholm University
We study real options in the labor market for investment management talent and show their importance for understanding the delegated investment management market. We solve and calibrate a dynamic equilibrium model featuring investment opportunities with differing maturities that interact with managers' career concerns. Managers strategically choose the horizon of their investment opportunities, and thereby affect the speed by which their skill is revealed. Short-term investment strategies benefit fund managers (particularly new ones) by accelerating skill revelation, while the downside risk is managed by manager exit. In the steady state, a large number of new and unskilled managers exploit the value of this call option, driving down the short-term value added of each manager in equilibrium. A small number of experienced and skilled managers exploit scalable long-term investment opportunities, adding substantial value. We empirically confirm our theoretical predictions using US mutual fund data. Our findings also have important implications for other industries where strategic task choice interacts with skill revelation.
Discussant: Darwin Choi, The Chinese University of Hong Kong
Investor Learning and the Aggregate Allocation of Capital to Active Management
Jeong Ho (John) Kim; Florida State University
We estimate a model in which Bayesian investors learn not only about differential ability across funds but also about the nature of decreasing returns to scale (DRS)---how a fund's performance depends on its size versus the size of its competition---in real time and competitively allocate capital to funds, conditional on their current beliefs. We find that prior beliefs in the early 1990s feature fund-level DRS that are much steeper than indicated by their unbiased estimates, and that distorted beliefs about fund-level DRS alone account for about 5% of the variation in the aggregate allocation of capital to the mutual fund industry in the data. Aggregate allocation to active management can be explained without appealing to behavioral arguments.
Discussant: Stephen Brown, Monash University