Management compensation and market timing under portfolio constraints

Vikas Agarwal, Juan-Pedro Gómez and Richard Priestley ()

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 10, 1600-1625

Abstract: This paper shows that portfolio constraints have important implications for management compensation and performance evaluation. In particular, in the presence of portfolio constraints, allowing for benchmarking can be beneficial. Benchmark design arises as an alternative effort inducement mechanism vis-a-vis relaxing portfolio constraints. Numerically, we solve jointly for the manager's linear incentive fee and the optimal benchmark. The size of the incentive fee and the risk adjustment in the benchmark composition are increasing in the investor's risk tolerance and the manager's ability to acquire and process private information.

Keywords: Market timing; Incentive fee; Benchmarking; Portfolio constraints (search for similar items in EconPapers)
JEL-codes: D81 D82 J33 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:10:p:1600-1625

DOI: 10.1016/j.jedc.2012.05.006

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