Organizational Structure and Fund Performance: Pension Funds vs. Mutual Funds
49 Pages Posted: 3 Sep 2009 Last revised: 31 Mar 2010
There are 2 versions of this paper
Organizational Structure and Fund Performance: Pension Funds vs. Mutual Funds
Date Written: January 11, 2010
Abstract
This paper examines whether the additional layers of delegation found in the pension fund industry generate agency costs that impair pension fund performance. Corporate treasurers, who have an incentive to reduce their own job risk, tend to hire pension fund managers with low tracking error. This may result in pension fund managers underweighting profitable investment opportunities in stocks outside of their benchmark. Consistent with this hypothesis, I find that pension funds tilt their trading towards S&P 500 stocks, both in absolute terms and relative to mutual funds. Moreover, I show that the trades made by pension funds in non-S&P 500 stocks significantly outperform their trades in S&P 500 stocks. After controlling for risk and transaction costs, I estimate that that the tracking error constraint imposed on pension funds weakens the performance of their trades by roughly 30 basis points per year.
Keywords: Pension Funds, Mutual Funds, Performance, Organizational Structure
JEL Classification: G11, G23
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Who Underreacts to Cash-Flow News? Evidence from Trading between Individuals and Institutions
By Randolph B. Cohen, Paul A. Gompers, ...
-
Individual Investor Sentiment and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
Individual Investor Trading and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
Individual Investor Sentiment and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
Individual Investor Sentiment and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
The Dynamics of Institutional and Individual Trading
By John M. Griffin, Selim Topaloglu, ...
-
Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?
By Zhe Zhang and Xuemin Sterling Yan
-
Momentum Trading by Institutions
By S.g. Badrinath and Sunil Wahal
-
Daily Momentum and Contrarian Behavior of Index Fund Investors