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Does Skin in the Game Matter? Director Incentives and Governance in the Mutual Fund Industry

Published online by Cambridge University Press:  09 October 2009

Martijn Cremers ,
Joost Driessen ,
Pascal Maenhout  and
David Weinbaum
Martijn Cremers
Affiliation:
Yale School of Management, Box 20820, New Haven, CT 06520. martijn.cremers@yale.edu
Joost Driessen
Affiliation:
University of Amsterdam, Faculty of Economics and Econometrics, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands. j.j.a.g.driessen@uva.nl
Pascal Maenhout
Affiliation:
INSEAD, Finance Department, Boulevard de Constance, 77305 Fontainebleau Cedex, France. pascal.maenhout@insead.edu
David Weinbaum
Affiliation:
Syracuse University, Whitman School of Management, 721 University Ave., Syracuse, NY 13244. dweinbau@syr.edu
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Abstract

We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or “skin in the game,” significantly underperform. We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 6 , December 2009 , pp. 1345 - 1373
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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