Working Paper: NBER ID: w14898
Authors: Veronica Guerrieri; Peter Kondor
Abstract: We propose a model where investors hire fund managers to invest either in risky bonds or in riskless assets. Some managers have superior information on the default probability. Looking at the past performance, investors update beliefs on their managers and make firing decisions. This leads to career concerns which affect investment decisions, generating a positive or negative "reputational premium". For example, when the default probability is high, uninformed managers prefer to invest in riskless assets to reduce the probability of being fired. As the economic and financial conditions change, the reputational premium amplifies the reaction of prices and capital flows.
Keywords: fund managers; career concerns; asset price volatility
JEL Codes: D53; D8; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| default probability (C46) | uninformed fund managers' preference for riskless assets (G11) |
| career concerns (J62) | reputational premium (G19) |
| reputational premium (G19) | asset price reactions to economic shocks (E44) |
| default probability (C46) | bond prices (G12) |
| bond prices (G12) | capital flows (F32) |
| career concerns (J62) | investment decisions of uninformed managers (G11) |
| uninformed managers' behavior (D80) | investment decisions distortion (G11) |