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Cross-Subsidization in Institutional Asset Management Firms

Author

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  • Ranadeb Chaudhuri
  • Zoran Ivković
  • Charles Trzcinka

Abstract

We study cross-subsidization among U.S. equity products managed by institutional asset management firms. We find returns-based evidence consistent with both cross-subsidization receipt by strong recent performers that are relatively small in their firms and provision by products that are relatively large in their firms. Tax-exempt investors and taxable investors do not have a clear ranking by expertise, but tax-exempt investors’ agency issues are more complex. Accordingly, taxable clients have more flow-performance nonlinearity and receive more (and provide less) cross-subsidization. Taxable investor flows appear more discerning, but only under the circumstances conducive to cross-subsidization, suggesting that “more discerning” likely means “more cross-subsidized.”Received May 11, 2015; editorial decision April 22, 2017 by Editor Andrew Karolyi.

Suggested Citation

  • Ranadeb Chaudhuri & Zoran Ivković & Charles Trzcinka, 2018. "Cross-Subsidization in Institutional Asset Management Firms," The Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 638-677.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:2:p:638-677.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx075
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    Cited by:

    1. Azi Ben-Rephael & Ryan D Israelsen, 2018. "Are Some Clients More Equal Than Others? An Analysis of Asset Management Companies’ Execution Costs [An analysis of trade-size clustering and its relation to stealth trading]," Review of Finance, European Finance Association, vol. 22(5), pages 1705-1736.
    2. Kräussl, Roman & Rinne, Kalle & Sunc, Huizhu, 2023. "Does family matter? Venture capital cross-fund cash flows," CFS Working Paper Series 695, Center for Financial Studies (CFS).
    3. Mark Grinblatt & Gergana Jostova & Lubomir Petrasek & Alexander Philipov, 2020. "Style and Skill: Hedge Funds, Mutual Funds, and Momentum," Management Science, INFORMS, vol. 66(12), pages 5505-5531, December.
    4. Hendriock, Mario, 2020. "Implied cost of capital and mutual fund performance," CFR Working Papers 20-11, University of Cologne, Centre for Financial Research (CFR).
    5. Wang, Xiaoxiao, 2023. "Bank affiliation and mutual funds’ trading strategy distinctiveness," International Review of Financial Analysis, Elsevier, vol. 88(C).

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