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Career Concerns in Financial Markets

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  • Andrea Prat
  • Amil Dasgupta

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 Þnancial 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

  • Andrea Prat & Amil Dasgupta, 2004. "Career Concerns in Financial Markets," FMG Discussion Papers dp494, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp494
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Andrea Prat & Amil Dasgupta, 2005. "Reputation and Price Dynamics in Financial Markets," 2005 Meeting Papers 222, Society for Economic Dynamics.

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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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