2018 GCGC
CONFERENCE: Harvard

1-2 June 2018

Career Risk and Market Discipline in Asset Management

Speaker:

Marco Pagano

Professor of Finance University of Naples Federico II

Discussant:

Abstract:

We establish that the labor market helps discipline asset managers via the impact of fund liquidations on their careers. Using hand-collected data on 1,948 profes- sionals, we find that top managers working for funds liquidated after persistently poor relative performance su er demotion entailing a yearly average compensation loss of $664,000. Scarring effects are absent when liquidations are preceded by normal performance or involve mid-level employees. Based on a model with moral hazard and adverse selection, we find that these results can be ascribed to reputation loss rather than bad luck. The findings suggest that performance-induced liquidations supplement compensation-based incentives.


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