Delegated Portfolio Management with Career Concerns

44 Pages Posted: 11 Apr 2011

See all articles by Massimo Scotti

Massimo Scotti

University of Technology Sydney

Date Written: March 8, 2011

Abstract

The paper proposes a model of delegated portfolio management in which career concerns lead to unprofitable trade by uninformed managers (i.e. churning). We find that churning does not necessarily reduce the return that a representative investor expects ex-ante from delegating trade to a manager. As uninformed managers churn, the level of noise in the market increases and informed managers generate higher returns than in the absence of churning. When fundamental volatility is relatively low, uninformed managers trade less aggressively and the high returns expected from informed managers more than compensate the losses expected from uninformed managers. While career concerns generally lead to an increase in trade volume, the pattern of churning that we highlight also implies that both the volume of uninformed trade and the aggregate volume of trade are positively related to the level of asset riskiness.

Keywords: Career concerns, financial equilibrium, investor returns, trade volume.

JEL Classification: C72, D82, G11, G12, G23

Suggested Citation

Scotti, Massimo, Delegated Portfolio Management with Career Concerns (March 8, 2011). Available at SSRN: https://ssrn.com/abstract=1806384 or http://dx.doi.org/10.2139/ssrn.1806384

Massimo Scotti (Contact Author)

University of Technology Sydney ( email )

15 Broadway, Ultimo
Sydney
Australia

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