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Managerial ability premium factor and fund performance

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  • Dong, Feng
  • Doukas, John A.

Abstract

We examine whether fund managers use corporate managerial ability (MA) as a point of reference in their portfolio investment decisions and find that skilled fund managers with significant loading on high-MA stocks outperform low-skill managers with low-loading on high-MA stocks by about 6% annually based on FFC 4-factor alpha over the 1990–2017 period. Consistent with our managerial ability premium (MAP) hypothesis we find negative MAP betas for high-selectivity funds (i.e., safer-funds with high exposure on High-MA stocks) and positive MAP betas for low-selectivity funds (i.e., funds with high exposure on Low-MA stocks). The implication of our findings is that the MAP has emerged as a new factor that has been overlooked in prior asset pricing studies.

Suggested Citation

  • Dong, Feng & Doukas, John A., 2021. "Managerial ability premium factor and fund performance," Journal of International Money and Finance, Elsevier, vol. 113(C).
    • Handle: RePEc:eee:jimfin:v:113:y:2021:i:c:s0261560621000024
    DOI: 10.1016/j.jimonfin.2021.102353
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    More about this item

    Keywords

    MAP factor; Fund management skill; Corporate managerial ability; Mutual fund performance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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