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The quality-assuring role of mutual fund advisory fees


Habib, Michel; Johnsen, D Bruce (2016). The quality-assuring role of mutual fund advisory fees. International Review of Law and Economics, 46:1-19.

Abstract

Active fund managers implicitly promise to research profitable portfolio selection. But active management is an experience good subject to moral hazard. Investors cannot tell high from low quality up front and therefore fear manager shirking. We show how the parties mitigate the moral hazard by paying the manager a premium fee sufficiently high that the manager's one-time gain from shirking is less than the capitalized value of the premium stream he earns from maintaining his promise to provide high quality. Premium advisory fees act as a quality-assuring bond. Our model has a number of revealing extensions and comparative statics.

Abstract

Active fund managers implicitly promise to research profitable portfolio selection. But active management is an experience good subject to moral hazard. Investors cannot tell high from low quality up front and therefore fear manager shirking. We show how the parties mitigate the moral hazard by paying the manager a premium fee sufficiently high that the manager's one-time gain from shirking is less than the capitalized value of the premium stream he earns from maintaining his promise to provide high quality. Premium advisory fees act as a quality-assuring bond. Our model has a number of revealing extensions and comparative statics.

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3 citations in Web of Science®
3 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Social Sciences & Humanities > Law
Language:English
Date:1 June 2016
Deposited On:26 Aug 2020 17:50
Last Modified:17 Sep 2020 11:23
Publisher:Elsevier
ISSN:0144-8188
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.irle.2015.11.003
Related URLs:https://www.sciencedirect.com/science/article/abs/pii/S0144818815000691 (Publisher)
Other Identification Number:merlin-id:19636

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