Do Fiduciary Duties Matter?

Abstract

Much of the existing literature on firm governance and investor protection focuses on the corporation and, hence, takes organizational form as a given. By comparing trusts and corporations, this paper examines governance at a more fundamental level and exploits heterogeneity in corporate and trust fiduciary duties. Using data from the British mutual fund industry, I find that mutual funds organized in trust form charge significantly lower fees and take on less risk than equivalent mutual funds organized in corporate form. Evidence also suggests that the trusts tend to underperform their corporate counterparts, even after adjusting for differences in risk. The results have implications for corporate governance design, suggesting that heightened fiduciary duties can enhance investor protection by mitigating agency conflict and managerial risk taking, though at the possible cost of inferior risk-adjusted performance.

Keywords: Fiduciary Duties, Organizational Form, Corporate Governance, Mutual Funds, Trusts