Allocation of decision rights and the investment strategy of mutual funds

Nishant Dass, Vikram Nanda and Qinghai Wang

Journal of Financial Economics, 2013, vol. 110, issue 1, 254-277

Abstract: The literature suggests that while decentralized decision making can allow for greater specialization in an organization, it heightens the cost of coordinating decisions. The mutual fund industry—in particular, sole- and team-managed balanced funds—provides an ideal setting to test the specialization versus coordination trade-off, as information on decision structures and fund actions is easily obtained. We show that sole-managed balanced funds, with centralized decision rights, exhibit significant market timing that requires reallocation across asset classes. However, consistent with coordination difficulties between managers specializing in particular asset classes, no market timing is evident in team-managed balanced funds. Team-managed funds exhibit greater returns from specialization, in the form of better security selection performance than sole-managed funds. These results hold cross-sectionally and for funds that switch management structures. The overall returns across different management structures are similar, indicating a market equilibrium. Investor flows reward market-timing performance for sole- but not team-managed funds.

Keywords: Teams; Coordination costs; Decision rights; Performance; Mutual funds (search for similar items in EconPapers)
JEL-codes: D23 G11 G23 L23 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:110:y:2013:i:1:p:254-277

DOI: 10.1016/j.jfineco.2013.06.004

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