http://hdl.handle.net/2451/25928 2026-04-12T06:31:46Z 2026-04-12T06:31:46Z Basak, Suleyman Pavlova, Anna Shapiro, Alex http://hdl.handle.net/2451/27442 2008-06-04T06:05:00Z 2002-12-01T00:00:00Z

Title: Offsetting the Incentives: Risk Shifting, and Benefits of Benchmarking in Money Management Authors: Basak, Suleyman; Pavlova, Anna; Shapiro, Alex Abstract: Money managers are rewarded for increasing the value of assets under management, and predominately so in the mutual fund industry. This compensation scheme gives the manager an implicit incentive to exploit the well-documented positive fund-flows to relative-performance relationship by manipulating her risk exposure. It also provides her with an explicit incentive to manage the fund in accordance with her own appetite for risk. In a dynamic asset allocation framework, we show that as the year-end approaches, the interplay of these incentives induces the manager to optimally closely mimic the index, relative to which her performance is evaluated, when the fund's year-to-date return is just sufficient to cause a higher expected flow. As she falls behind, she gradually increases her risk exposure (via leverage or short selling), reaching an extremum at a critical level of underperformance. This policy results in economically significant deviations from investor's desired risk exposure, substantially impairing them. To better align investors' and managers' incentives, investors or regulators can impose a benchmarking restriction on the fund manager, prohibiting a shortfall relative to a certain reference portfolio to exceed a pre-specified level. The restriction tempers deviations from the investors' desired risk exposure in the states in which the manager is tempted to deviate the most, and hence is beneficial. The analysis reveals how this risk management restriction should be designed for the highest benefit to the investors. Our findings complement and refine results in the related literature on risk taking incentives of mutual fund managers, and are at odds with previous work arguing against benchmarking.

2002-12-01T00:00:00Z Amihud, Yakov Li, Kefei http://hdl.handle.net/2451/27441 2008-06-04T06:03:20Z 2002-08-01T00:00:00Z

Title: The Declining Information Content of Dividend Announcements and the Effect of Institutional Holdings Authors: Amihud, Yakov; Li, Kefei Abstract: We propose an explanation for the "disappearing dividend" phenomenon: the decline in the information content of dividend announcements. This reduces the propensity of firms to pay or increase dividends, since dividends are costly. The decline in the information content of dividend, is partly because of the rise in stockholding by institutional investors that are more sophisticated and informed. Our results show a decline in the stock price reaction to announcements of dividend changes since the mid 1970s. Across firms, the price reaction to dividend news is smaller in firms with high institutional holdings. Institutional investors exploit their superior information by buying before dividend increases and selling afterwards. And, firms with high institutional holdings are less likely to raise dividends.

2002-08-01T00:00:00Z Dai, Qiang http://hdl.handle.net/2451/27440 2008-06-03T17:03:41Z 2002-10-29T00:00:00Z

Title: Time Series and Cross-sectional Variations of Expected Returns Authors: Dai, Qiang Abstract: The paper develops a general equilibrium stochastic growth model of a multi-sector economy subject to i.i.d. taste shocks. Each sector produces one good, and each firm has a linear production technology and faces a quadratic capital adjustment cost. The model contains a standard intertemporal capital asset pricing theory of consumption and portfolio demands with dynamically complete and frictionless markets and a standard q-theory of investment under uncertainty. We show that the equilibrium stochastic investment opportunity set is driven by the relative shares of firms' nominal capital stocks, and the equilibrium dynamics of the state vector is driven by firms' relative investment intensities. Key implications of the model includes (i) the expected equity returns are endogenously predictable both over time and in the cross-section; and (ii) the "value anomaly" arises in a rational expectations equilibrium due to a negative (positive) hedging demand for value (growth) stocks against the risk of cross-sectional dispersion of firms' nominal capital stocks.

2002-10-29T00:00:00Z Elton, Edwin J. Gruber, Martin J. http://hdl.handle.net/2451/27439 2008-06-04T06:02:08Z 2002-10-08T00:00:00Z

Title: Optimum Centralized Portfolio Construction with Decentralized Portfolio Management Authors: Elton, Edwin J.; Gruber, Martin J. Abstract: Many financial institutions employ outside portfolio managers to manage part or all of their investable assets. These institutions include pension funds, private endowments (e.g., colleges and charities), and private trusts. In 1999, the investment company institute estimated that these institutions managed 5.2 trillion dollars in assets. Most of these institutions employed outside managers to invest these funds. The relevancy of this problem has been widely recognized in the practitioners literature on portfolio. Furthermore, it is recognized in the prudent man law that spells out the responsibilities of the centralized decision maker delegating management responsibility.2 For example the New York State law in estate power and trust states. Pension funds are the largest and most likely organizations to employ several outside managers, each of whom manages a part of the overall portfolio. In this paper we will use the pension fund manager as the prototype of the centralized decision-maker trying to optimally manage a set of decentralized portfolio managers but the analysts is general.

2002-10-08T00:00:00Z