Document Type

Article

Language

eng

Publication Date

9-2010

Publisher

Elsevier

Source Publication

Journal of Corporate Finance

Source ISSN

0929-1199

Abstract

I examine the ex ante decision to make an agent's pay-performance sensitivity an inverse function of organization size. I focus on mutual funds and their decision to use compensation contracts that reduce the advisor's marginal compensation as the fund grows (a declining-rate contract) over the dominant contract type, where marginal compensation is unrelated to fund size (a single-rate contract). I find evidence consistent with the view that declining-rate contracts are a mechanism to keep marginal compensation in line with the advisor's declining marginal product. Specifically, I find that funds with greater exposure to diseconomies of scale are more likely to use a declining-rate contract and to specify a greater amount of compensation decline in their contracts. Consistent with optimal contracting, I find no evidence of a performance difference between funds with declining-rate contracts and funds with single-rate contracts.

Comments

Accepted version. Journal of Corporate Finance, Vol 16, No. 4 (September 2010): 400-412. DOI. © 2010 Elsevier B.V. Used with permission.

George D. Cashman was affiliated with Texas Tech University at the time of publication.

Download

Share

COinS