Career concerns and investment maturity in mutual funds

Yolanda Portilla

Economics Working Papers from Universidad Carlos III, Departamento de Economía

Abstract: An important puzzle in financial economics is why fund managers invest in short-maturity assets when they could obtain larger profits in assets with longer maturity. This work provides an explanation to this fact based on labor contracts signed between institutional investors and fund managers. Using a career concern setup, we examine how the optimal contract design, in the presence of both explicit and implicit incentives, affects the fund managers decisions on investment horizons. A numerical analysis characterizes situations in which young (old) managers prefer short-maturity (long-maturity) positions. However, when including multitask analysis, we find that career concerned managers are bolder and also prefer assets with long maturity.

Keywords: Contract theory; Career concerns; Financial equilibrium; Investment maturity (search for similar items in EconPapers)
JEL-codes: G29 J44 J24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-lab
Date: 2009-03

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Persistent link: http://EconPapers.repec.org/RePEc:cte:werepe:we091106

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