The Cross‐Section of Managerial Ability, Incentives, and Risk Preferences

Abstract

I estimate a dynamic investment model for mutual managers to study the crosssectional distribution of ability, incentives, and risk preferences. The manager's compensation depends on the size of the fund, which fluctuates due to fund returns and due to fund flows that respond to the fund's relative performance. The model provides an economic interpretation of time-varying coefficients in performance regressions in terms of the structural parameters. I document that the estimates of fund alphas are precise and virtually unbiased. I find substantial heterogeneity in ability, risk preferences, and pay-for-performance sensitivities that relates to observable fund characteristics.

Time-Varying Fund Manager Skill

“…Notable exceptions are Mamaysky, Spiegel, and Zhang (2008) who find evidence for market timing using Kalman filtering techniques, and Bollen and Busse (2001) and Elton, Gruber, and Blake (2011) who find evidence of market timing using higher frequency holdings data. Our finding that some managers have skill is consistent with a number of recent papers in the empirical mutual fund literature, e.g., Pástor and Stambaugh (2002), Kacperczyk, Sialm, andZheng (2005, 2008), Kacperczyk and Seru (2007), Christoffersen, Keim, and Musto (2007), Cremers and Petajisto (2009), Koijen (2010), Baker, Litov, Wachter, and Wurgler (2010), Huang, Sialm, and Zhang (2011), Amihud andGoyenko (2011), andCohen, Polk, andSilli (2011).…”

The Performance Persistence of Winner Fund Managers - Evidence from the Timing and Stock Picking Ability

“…However, some researches denote that some funds can perform well persistently (Kacperczyk et al, 2005;2008;Christoffersen et al, 2007;Kacperczyk and Seru, 2007;Cremers and Petajisto, 2009;Baker et al, 2010;Cohen et al, 2011;Huang et al, 2011;Amihud and Goyenko, 2013;Koijen, 2014). The consistent result of the literature points out some of the best fund managers have stocking picking ability, but they almost have no timing ability (Ferson and Schadt, 1996;Graham and Harvey, 1996;Daniel et al, 1997;Becker et al, 1999;Kacperczyk and Seru, 2007).…”

Realism, Skill & Incentives: Current and Future Trends in Investment Management and Investment Performance

“…These data can be used for corporate governance purposes so the provision of these data will continue to fuel the search for appropriate managerial incentives. The theme of incentives is one area which has benefited from increasing availability of data allowing Guercio and Reuter (2014) to consider mutual funds' incentive to generate alpha or Koijen (2014) to consider ability, incentives, and risk preferences. The strategies of fund families is now open to appraisal, Gervais et al (2005) or Fang et al (2014), as is the role of fund directors, Ferris and Yan (2007).…”

“…This would be consistent with Kacperczyk et al's (2014) skill. Koijen (2014) produces a dynamic model which addresses two fundamental questions: Do mutual fund managers possess skill and do managerial incentives influence risk taking? Koijen's (2014) model is applied to U.S. equity funds data and separates out managers' ability, risk preferences, and managerial incentives.…”

“…Koijen (2014) produces a dynamic model which addresses two fundamental questions: Do mutual fund managers possess skill and do managerial incentives influence risk taking? Koijen's (2014) model is applied to U.S. equity funds data and separates out managers' ability, risk preferences, and managerial incentives. The structural model embodied in the study aids fund selection via more precise estimates of manager skill, expected return per unit of additional risk, and to some degree, the time-varying beta due to variation in benchmark exposure.…”