Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-15T07:02:35.860Z Has data issue: false hasContentIssue false
  • English
  • Français

Empirical Tests of a Principal-Agent Model of the Investor-Investment Advisor Relationship

Published online by Cambridge University Press:  06 April 2009

Joseph H. Golec
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper develops a specialized principal-agent model of the investor-investment advisor relationship and embeds the standard advisory compensation schedule in the model. Advisors are endowed with information-gathering abilities and investors are endowed with funds. Information-gathering services are traded indirectly through the investor's receipt of portfolio returns net of advisory fees. Model results show that the parameters of the compensation schedule are both a function of the idiosyncracies of an advisor's information services and the degree of risk sharing between the advisor and investor. Several predictions of the model are supported using data on mutual fund advisors. Unsupported predictions may be due to self-selection of advisors by risk tolerance.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 1 , March 1992 , pp. 81 - 95
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A. R., and Pfleiderer, P.. “Selling and Trading on Information in Financial Markets.” American Economic Review, 78 (05 1988), 96–103.Google Scholar
Agrawal, A., and Mandelker, G. N.. “Managerial Incentives and Corporate Investment and Financing Decisions.” Journal of Finance, 42 (09. 1987), 823–837.Google Scholar
Baron, D. P. “A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues.” Journal of Finance, 37 (09. 1982), 955–976.Google Scholar
Campbell, T. S., and Kracaw, W. A.. “The Market for Managerial Labor Services and Capital Market Equilibrium.” Journal of Financial and Quantitative Analysis, 20 (09. 1985), 277–297.Google Scholar
Campbell, T. S., and Kracaw, W. A.. “Optimal Managerial Incentive Contracts and the Value of Corporate Insurance.” Journal of Financial and Quantitative Analysis, 22 (09. 1987), 315–328.Google Scholar
Healy, P. “The Effects of Bonus Schemes on Accounting Decisions.” Journal of Accounting and Economics, 1 (04 1985), 85–107.Google Scholar
Holmstrom, B. “Moral Hazard and Observability.” Bell Journal of Economics, 10 (Spring 1979), 74–91.CrossRefGoogle Scholar
Holmstrom, B., and Milgrom, P.. “Aggregation and Linearity in the Provision of Intertemporal Incentives.” Econometrica, 55 (03 1987), 303–328.Google Scholar
Jensen, M. C. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance, 23 (05 1968), 386–416.Google Scholar
Jensen, M. C, and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.” Journal of Financial Economics, 3 (10. 1976), 305–360.Google Scholar
Larcker, D. “The Association between Performance Plan Adoption and Corporate Capital Investment.” Journal of Accounting and Economics, 5 (04 1985), 209–232.Google Scholar
Leland, H. E. “Optimal Risk Sharing and the Leasing of Natural Resources, with Application to Oil and Gas Leasing on the OCS.” The Quarterly Journal of Economics, 92 (08. 1978), 413–37.CrossRefGoogle Scholar
Modigliani, F, and Pogue, G.. “Alternative Investment Performance Fee Arrangements and Implications for SEC Regulatory Policy.” Bell Journal of Economics, 6 (Spring 1975), 127–160.Google Scholar
Moody's Bank and Finance Manual. New York: Moody's Investor Services (1985).Google Scholar
Ramakrishnan, R. T. S., and Thakor, A. V.. “The Valuation of Assets under Moral Hazard.” Journal of Finance, 39 (03 1984), 229–238.CrossRefGoogle Scholar
Ross, S. A. “The Economic Theory of Agency: The Principal's Problem.” American Economic Review, 63 (05 1973), 134–139.Google Scholar
Starks, L. “Performance Incentive Fees: An Agency Theoretic Approach.” Journal of Financial and Quantitative Analysis, 22 (03 1987), 17–32.Google Scholar
Tehranian, H.; Travlos, N. G.; and Waegelein, J. F.. “The Effects of Long-Term Performance Plans on Corporate Sell-Off-Induced Abnormal Returns.” Journal of Finance, 42 (09. 1987), 933–942.Google Scholar
Trueman, B. “A Theory of Noise Trading in Securities Markets.” Journal of Finance, 43 (03 1988), 83–95.CrossRefGoogle Scholar
Weitzman, M. L. “Efficient Incentive Contracts.” Quarterly Journal of Economics, 94 (06 1980), 719–730.Google Scholar