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Management Compensation and the Performance of Mutual Funds

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  • Michael K. Berkowitz
  • Yehuda Kotowitz

Abstract

This paper examines the mutual fund market as a market for the sale of management services using an unbalanced panel of 860 US equity funds over the 1976-1993 period. From among the performance measures for which investors have the necessary information to compute, we find that the Jensen measure best explains the change in market shares over time. It is found, however, that investors actually value the systematic component of risk more than indicated by the use of Jensen's performance measure. Our results also suggest that investors in load funds are less responsive to both components of performance (risk and return) than are investors in no-load funds. Investors, moreover, value recent past performance differently for funds with different attributes. An important result of the paper relating to the incentives provided with the widely used fixed-fee compensation schemes is that past fund performance influences individual investment decisions and hence future net asset values of funds, implying strong incentives for managers to increase their performance and by doing so, their compensation.

Suggested Citation

  • Michael K. Berkowitz & Yehuda Kotowitz, 1997. "Management Compensation and the Performance of Mutual Funds," Working Papers berk-97-01, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:berk-97-01
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    References listed on IDEAS

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    12. M. K. Berkowitz & Y. Kotowitz, 1993. "Incentives and Efficiency in the Market for Management Services: A Study of Canadian Mutual Funds," Canadian Journal of Economics, Canadian Economics Association, vol. 26(4), pages 850-866, November.
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    Cited by:

    1. Michael K. Berkowitz & Yehuda Kotowitz, 1997. "The Determinants of Management Expenses," Working Papers berk-97-02, University of Toronto, Department of Economics.

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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