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Career concerns in financial markets

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  • Dasgupta, Amil
  • Prat, Andrea

Abstract

What are the equilibrium features of a market where a sizeable portion of traders face career concerns? This question is central to our understanding of financial markets that are increasingly dominated by institutional investors. We construct a model of delegated portfolio management that captures key features of the US mutual fund industry and we embed it into an asset pricing set-up. Fund managers differ in their ability to understand market fundamentals, and in every period investors choose a fund. In equilibrium, the presence of career concerns induces uninformed fund managers to churn, i.e. to engage in trading even when they face a negative expected return. As churning plays the role of noise trading, the asset market displays non-fully informative prices and positive (and high) trading volume. The equilibrium relationship between fund return and net fund flows displays a skewed shape that is consistent with stylized facts. The robustness of our core results is probed from several angles.

Suggested Citation

  • Dasgupta, Amil & Prat, Andrea, 2004. "Career concerns in financial markets," LSE Research Online Documents on Economics 24706, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24706
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    References listed on IDEAS

    as
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    Cited by:

    1. Andrea Prat & Amil Dasgupta, 2005. "Reputation and Price Dynamics in Financial Markets," 2005 Meeting Papers 222, Society for Economic Dynamics.
    2. Amil Dasgupta & Andrea Prat, 2005. "Reputation and Asset Prices: A Theory of Information Cascades and Systematic Mispricing," Levine's Bibliography 784828000000000368, UCLA Department of Economics.

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    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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