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RFS Advance Access published online on August 31, 2005
Review of Financial Studies, doi:10.1093/rfs/hhi031
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© The Author 2005. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org
Received October 25, 2004

Article

Fund Families as Delegated Monitors of Money Managers*

Simon Gervais 1*, Anthony W. Lynch 2, and David K. Musto 3
1 Duke University
2 New York University and NBER
3 University of Pennsylvania

* To whom correspondence should be addressed.
Simon Gervais, E-mail: sgervais{at}duke.edu


  Abstract

Because a money manager learns more about her skill from her management experience than outsiders can learn from her realized returns, she expects ine .ciency in future contracts that condition exclusively on realized returns. A fund family that learns what the manager learns can reduce this inefficiency cost if the family is large enough. The family ’s incentive is to retain any given manager regardless of her skill but, when the family has enough managers, it adds value by boosting the credibility of its retentions through the firing of others. As the number of managers grows, the efficiency loss goes to zero.

*This is an updated version of a paper previously circulated under the title "Delegated Monitoring of Fund Managers." Financial support by the Rodney L. White Center for Financial Research is gratefully acknowledged. We have benefited from discussions with Zhiwu Chen, Judith Chevalier, Francesca Cornelli, Heber Farnsworth, Eitan Goldman, Francisco Gomes, Gary Gorton, Gustavo Grullon, Harrison Hong, Jonathan Ingersoll, George Kanatas, Richard Kihlstrom, Dmitry Livdan, Christine Parlour, and Matt Spiegel. Also providing helpful comments and suggestions were Maureen O’Hara, two anonymous referees and seminar participants at UC Berkeley, Carnegie Mellon University, Cornell University, Duke University, HEC Montréal, INSEAD, the London Business School, the London School of Economics, The University of North Carolina at Chapel Hill, Queen’s University,Rice University, Stanford University, Texas Christian University, Virginia Tech,Washington University, the Wharton School, Yale University, the AIM conference at UT Austin, and the CIRANO conference on Fund Management. All remaining errors are of course the authors ’responsibility.
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