Fund Managers, Career Concerns, and Asset Price Volatility
Veronica Guerrieri, Péter Kondor
American Economic Review · 2012 · Volume 102 · Issue 5
Abstract
We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on default risk. Based on past performance, investors update beliefs on managers and make firing decisions. This leads to career concerns that affect managers' investment decisions, generating a countercyclical "reputational premium." When default risk is high, return on bonds is high to compensate uninformed managers for the high risk of being fired. As default risk changes over time, the reputational premium amplifies price volatility. (JEL G11, G12, G23, L84)
Keywords
Portfolio Choice, Investment Decisions, Asset Pricing, Trading volume, Bond Interest Rates, Pension Funds, Other Private Financial Institutions, Institutional Investors, Personal, Professional, and Business Services
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