Career Risk and Market Discipline in Asset Management

Career Risk and Market Discipline in Asset Management

Andrew Ellul, Marco Pagano, Annalisa Scognamiglio

Series number :

Serial Number: 
558/2018

Date posted :

April 16 2018

Last revised :

April 14 2018
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Keywords

  • Careers • 
  • Hedge Funds • 
  • Asset Managers • 
  • market discipline • 
  • Scarring Effects

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 professionals, we find that top managers working for funds liquidated after persistently poor relative performance suffer 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.
 

Authors

Real name:
Annalisa Scognamiglio