Working Paper: CEPR ID: DP12851
Authors: Andrew Ellul; Marco Pagano; Annalisa Scognamiglio
Abstract: 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 canbe ascribed to reputation loss rather than bad luck. The findings suggest that performance-induced liquidations supplement compensation-based incentives.
Keywords: careers; hedge funds; asset managers; market discipline; scarring effects
JEL Codes: G20; G23; J24; J62; J63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fund liquidations (G33) | career setbacks (J62) |
| poor relative performance (P17) | fund liquidations (G33) |
| fund liquidations (G33) | job demotion (J62) |
| fund liquidations (G33) | reputation loss (G33) |
| reputation loss (G33) | negative career outcomes (D91) |
| performance-induced liquidations (G33) | compensation-based incentives (M52) |
| liquidated hedge funds underperformance (G33) | labor market disciplinary effect (J48) |