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.
William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance
Harvard Law School
Professor of Finance/FIRN director, Commonwealth Bank Chair in Finance
University of New South Wales
Scientia Professor in Finance, University of New South Wales