Autore
Gumbel, Alexander

Titolo
Herding in delegated portfolio management: When is comparative performance information desirable?
Periodico
European University Institute of Badia Fiesolana (Fi). Department of Economics - Working papers
Anno: 1998 - Fascicolo: 22 - Pagina iniziale: 1 - Pagina finale: 35

In this paper we address the issue of investors' asset allocation decisions when they delegate portfolio management to an agent. Contrary to predictions from traditional financial theory, it is found that investors may not induce their fund manager to allocate the funds to the assei with the highest return. Instead they may wish to induce trade in a particular asset, because another manager is trading in it and despite the presence of a more profitable alternative. Doing so allows investors to write an efficiency-improving relative-performance contract. On the other hand, herding leads principals to design wage contracts strategically, resulting in more aggressive and thus less profitable trade in equilibrium. We show that investors herd in their asset allocation decision, when managers are sufficiently risk averse or when the precision of their information is low. We also show that when principals can decide whether or not to disclose information about their manager's performance, they will not do so and thus the problem of designing contracts strategically can be avoided.



Testo completo: http://www.iue.it/ECO/WP-Texts/98_22.pdf

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