Outsourcing mutual fund management

Firm boundaries, incentives, and performance

Joseph Chen, Harrison Hong, Wenxi Jiang, Jeffrey David Kubik

Research output: Contribution to journalArticle

39 Citations (Scopus)

Abstract

We investigate the effects of managerial outsourcing on the performance and incentives of mutual funds. Fund families outsource the management of a large fraction of their funds to advisory firms. These funds underperform those run internally by about 52 basis points per year. After instrumenting for a fund's outsourcing status, the estimated underperformance is three times larger. We hypothesize that contractual externalities due to firm boundaries make it difficult to extract performance from an outsourced relationship. Consistent with this view, outsourced funds face higher powered incentives; they are more likely to be closed after poor performance and excessive risk-taking.

Original languageEnglish (US)
Pages (from-to)523-558
Number of pages36
JournalJournal of Finance
Volume68
Issue number2
DOIs
StatePublished - Apr 2013

Fingerprint

Firm boundaries
Mutual funds
Incentives
Outsourcing
Fund management
Underperformance
Externalities
Risk taking

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Outsourcing mutual fund management : Firm boundaries, incentives, and performance. / Chen, Joseph; Hong, Harrison; Jiang, Wenxi; Kubik, Jeffrey David.

In: Journal of Finance, Vol. 68, No. 2, 04.2013, p. 523-558.

Research output: Contribution to journalArticle

Chen, Joseph ; Hong, Harrison ; Jiang, Wenxi ; Kubik, Jeffrey David. / Outsourcing mutual fund management : Firm boundaries, incentives, and performance. In: Journal of Finance. 2013 ; Vol. 68, No. 2. pp. 523-558.
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