The Quality-Assuring Role of Mutual Fund Advisory Fees

Michel A. Habib and D. Bruce Johnsen
Additional contact information
Michel A. Habib: University of Zurich; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
D. Bruce Johnsen: George Mason University - School of Law; PERC - Property and Environment Research Center

No 16-16, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Active fund managers implicitly promise to research profitable portfolio selection. But active management is an experience good subject to moral hazard. Investors cannot tell high from low quality up front and therefore fear manager shirking. We show how the parties mitigate the moral hazard by paying the manager a premium fee sufficiently high that the manager’s one-time gain from shirking is less than the capitalized value of the premium stream he earns from maintaining his promise to provide high quality. Premium advisory fees act as a quality-assuring bond. Our model has a number of revealing extensions and comparative statics.

Keywords: Excessive fees; advisory fees; quality-assurance; open-access; closet indexing (search for similar items in EconPapers)
JEL-codes: D23 D86 G23 L22 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2016-02, Revised 2016-04
New Economics Papers: this item is included in nep-cse
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://ssrn.com/abstract=2745907 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1616

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().