Fund Management Structure and Conflicts of Interest: Evidence from Business Development Companies

Abstract

Using the universe of Business Development Companies for the period 2006-17, we analyze the effects of fund management structure on managerial decisions and fund premiums. We show that externally managed funds trade at significantly higher discounts relative to their internally managed counterparts and they are 74% (67%) less likely to announce (execute) value enhancing share repurchase programs. We further find a significantly higher positive market reaction to share repurchase announcements of externally relative to internally managed funds. Overall, we show the benefits of internal management structure in avoiding agency costs associated with the dependence of managerial compensation on total assets.

Keywords: Fund Management Structure, Agency Costs, Share Repurchases, Portfolio Performance, Business Development Companies

JEL Classification: G2, G3, G14