Faculty Digital Archive

Archive@NYU >
Stern School of Business >
Finance Working Papers >

Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/27242

Title: Fee Speech: Signalling and the Regulation of Mutual Fund Fees
Authors: Das, Sanjiv Ranjan
Sundaram, Rangarajan K.
Issue Date: 4-Apr-1999
Series/Report no.: FIN-99-085
Abstract: The Investment Advisers Act of 1940 (as amended in 1970) prohibits mutual funds in the US from offering their advisers asymmetric "incentive fee" contracts in which the advises are rewarded for superior performance via-a-vis a chosen index but are not correspondingly penalized for underforming it. The rationale offered in defense of the regulation by both the SEC and Congress is that incentive fee structures of this sort encourage "excessive" risk-taking by advisers. Apart from affecting portfolio selection incentives, however, the fee structure also influences equilibrium welfare levels in two other important ways: (a) through its risk-sharing properties, and (b) through its potential at conveying information about the adviser's abilities. This paper examines a signalling model with multiple funds and multiple risky securities in which all of these effects are present. We find the incentives fees do, as alleged, lead to more (and suboptimal) risk-taking than do symmetric "fulcrum fees." Nonetheless, taking into account the other roles of the fee structure, we find under robust conditions that investors may actually be strictly better off from a welfare standpoint under asymmetric incentives fee structures. In summary, we do not find much justification for the regulation.
URI: http://hdl.handle.net/2451/27242
Appears in Collections:Finance Working Papers

Files in This Item:

File Description SizeFormat
wpa99085.pdf336.19 kBAdobe PDFView/Open

Items in Faculty Digital Archive are protected by copyright, with all rights reserved, unless otherwise indicated.


The contents of the FDA may be subject to copyright, be offered under a Creative Commons license, or be in the public domain.
Please check items for rights statements. For information about NYU’s copyright policy, see http://www.nyu.edu/footer/copyright-and-fair-use.html 
Valid XHTML 1.0 | CSS