2018 GCGC

1-2 June 2018

Career Risk and Market Discipline in Asset Management


Marco Pagano

Professor of Finance University of Naples Federico II


Claudia Custodio

Associate Professor of Finance Imperial College London


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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