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The Selection and Termination of Investment Management Firms by Plan Sponsors




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    • Goyal is at the Goizueta Business School, Emory University and Wahal is at the WP Carey School of Business, Arizona State University. We are indebted to Allison Howard and Nick Mencher at Invesco; David Baeckelandt, Maggie Griffin, and Robert Stein at Mercer Investment Consulting; Keith Arends at iisearches for assistance with data issues; and to the Goizueta Business School and the Q-Group for financial support. Jesse Ferlianto, Peter Left, Margaret Petri, Marko Svetina, and Fridge Vanzyp provided research assistance. We thank an anonymous referee, Roberto Barontini, George Benston, Mark Carhart, Chris Geczy, Charles Hadlock, Larry Harris, Narasimhan Jegadeesh, Kevin Johnson, Ananth Madhavan, and Ed Rice and the seminar participants at Hong Kong University of Science and Technology, the University of Washington, Goldman Sachs Asset Management, Arizona State University, University of California at Irvine, Barclays Global Investors, Boston College, Brown University, the European Finance Association Meetings in Moscow, the American Finance Association meetings in Boston, and the Mitsui Life Symposium at the University of Michigan for helpful comments and suggestions.


We examine the selection and termination of investment management firms by 3,400 plan sponsors between 1994 and 2003. Plan sponsors hire investment managers after large positive excess returns but this return-chasing behavior does not deliver positive excess returns thereafter. Investment managers are terminated for a variety of reasons, including but not limited to underperformance. Excess returns after terminations are typically indistinguishable from zero but in some cases positive. In a sample of round-trip firing and hiring decisions, we find that if plan sponsors had stayed with fired investment managers, their excess returns would be no different from those delivered by newly hired managers. We uncover significant variation in pre- and post-hiring and firing returns that is related to plan sponsor characteristics.

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