Document Type

Article

Language

eng

Publication Date

11-2009

Publisher

Elsevier

Source Publication

Journal of Financial Markets

Source ISSN

1386-4181

Abstract

Mutual fund advisors make portfolio decisions for their funds on a daily basis. We examine the location of these portfolio decision rights on two dimensions. First, we consider the geographic location of the decision rights. Second, we consider whether the decision rights remain with an advisor or are allocated to an independent sub-advisor. We argue that the allocation of portfolio decision rights involves a tradeoff between the opportunity cost of not matching decision rights with specific knowledge, and the agency costs associated with moving the decision rights to the specific knowledge. The patterns in the location of decision rights are consistent with the tradeoff being a meaningful determinant of the allocation of decision rights in the mutual fund industry. We also find that funds that are predicted to be sub-advised and are sub-advised outperform those that are predicted to be sub-advised but are not.

Comments

Accepted version. Journal of Financial Markets, Vol. 12, No. 4 (November 2009): 645-671. DOI, © 2009 Elsevier B.V. Used with permission.

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

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