The Cross-Section of Managerial Ability, Incentives, and Risk Preferences

Authors

  • RALPH S.J. KOIJEN

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    • Koijen is associated with University of Chicago's Booth School of Business, NBER, and Netspar (Tilburg University). I thank the Editor, Campbell R. Harvey, the Associate Editor, and an anonymous referee for their valuable suggestions that substantially improved the paper. I also thank Yacine Aït-Sahalia; Lieven Baele; Bo Becker; Jonathan Berk; Jules van Binsbergen; Lans Bovenberg; Michael Brandt; Wolfgang Buehler; John Campbell; Jennifer Carpenter; John Cochrane; George Constantinides; Rich Evans; Xavier Gabaix; Eric Ghysels; Alexei Goriaev; Rick Green; Marty Gruber; Zhiguo He; John Heaton; Jennifer Huang; Tim Johnson; Marcin Kacperczyk; Eugene Kandel; Ron Kaniel; Peter Kondor; Hanno Lustig; Anthony Lynch; Theo Nijman; Ľuboš Pástor; Josh Pollet; Matt Richardson; Viorel Roscovan; Olivier Scaillet; Clemens Sialm; Rob Stambaugh; Otto Van Hemert; Stijn Van Nieuwerburgh; Pietro Veronesi; Jay Wang; Bas Werker; Russ Wermers; Robert Whitelaw; and seminar participants at Chicago Booth, Harvard University, Imperial College, INSEAD, London Business School, London School of Economics, Massachusetts Institute of Technology's Sloan School of Management, New York University's Stern School of Business, University of Rochester's William E. Simon Graduate School of Business Administration, Stanford Graduate School of Business, Tilburg University, University of British Columbia, University of California, San Diego's Rady School of Management, University of California, Los Angeles's Anderson School of Management, University of Illinois at Urbana–Champaign, University of Amsterdam, University of Lausanne, Yale School of Management, European Finance Association Meetings, American Finance Association Meetings, New Stars in Finance Conference, CREATES symposium on dynamic asset allocation, 2010 World Econometric Society Meeting in Shanghai, and Q-Group Conference for useful discussions and suggestions. I thank the Q-Group for financial support.


ABSTRACT

I estimate a dynamic investment model for mutual managers to study the cross-sectional distribution of ability, incentives, and risk preferences. The manager's compensation depends on the size of the fund, which fluctuates due to fund returns and due to fund flows that respond to the fund's relative performance. The model provides an economic interpretation of time-varying coefficients in performance regressions in terms of the structural parameters. I document that the estimates of fund alphas are precise and virtually unbiased. I find substantial heterogeneity in ability, risk preferences, and pay-for-performance sensitivities that relates to observable fund characteristics.

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