Career Risk and Market Discipline in Asset Management. (10th June 2019)

• Record Type: Journal Article
• Authors: Ellul, Andrew; Pagano, Marco; Scognamiglio, Annalisa
• Editors: Jiang, Wei
• Is Part Of: Review of financial studies. Volume 33:Number 2(2020)
• Page Start: 783
• Page End: 828
• Publication Date: 2019-06-10
• Subjects: Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhz062
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract: We establish that the labor market helps discipline asset managers via the impact of fund liquidations on their careers. Using hand-collected data on 1, 948 professionals, we find that top managers working for funds liquidated after persistently poor relative performance suffer demotion coupled with a significant loss in imputed compensation. Scarring effects are absent when liquidations are preceded by normal relative performance or involve mid-level employees. Seen through the lens of a model with moral hazard and adverse selection, these scarring effects can be ascribed to a drop in asset managers' reputation. The findings suggest that performance-induced liquidations supplement compensation-based incentives. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.