Hostname: page-component-7c8c6479df-7qhmt Total loading time: 0 Render date: 2024-03-27T20:17:28.124Z Has data issue: false hasContentIssue false

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
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

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
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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

Andrews, D. “Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation.” Econometrica, 59 (1991), 817858.CrossRefGoogle Scholar
Baysinger, B., and Butler, H.. “Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition.” Journal of Law, Economics and Organization, 1 (1985), 101124.Google Scholar
Berk, J., and Green, R.. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy, 112 (2004), 12691295.CrossRefGoogle Scholar
Berk, J., and Xu, J.. “Persistence and Fund Flows of the Worst Performing Mutual Funds.” Working Paper, University of California (2004).Google Scholar
Blake, C.; Elton, E.; and Gruber, M.. “The Performance of Bond Mutual Funds.” Journal of Business, 66 (1993), 371403.CrossRefGoogle Scholar
Brickley, J.; Coles, J.; and Terry, R.. “Outside Directors and the Adoption of Poison Pills.” Journal of Financial Economics, 35 (1994), 371390.CrossRefGoogle Scholar
Byrd, J., and Hickman, K.. “Do Outside Directors Monitor Managers? Evidence from Tender Offer Bids.” Journal of Financial Economics, 32 (1992), 195221.CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 5782.CrossRefGoogle Scholar
Carter, D. “Mutual Fund Boards and Shareholder Action.” Villanova Journal of Law and Investment Management, 3 (2001), 639.Google Scholar
Chen, J.; Hong, H.; Huang, M.; and Kubik, J.. “Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization.” American Economic Review, 94 (2004), 12761302.CrossRefGoogle Scholar
Chen, Q.; Goldstein, I.; and Jiang, W.. “Directors’ Ownership in the U.S. Mutual Fund Industry.” Working Paper, University of Pennsylvania (2005).CrossRefGoogle Scholar
Cotter, J.; Shivdasani, A.; and Zenner, M.. “Do Independent Directors Enhance Target Shareholder Wealth during Tender Offers?Journal of Financial Economics, 43 (1997), 195218.CrossRefGoogle Scholar
Del Guercio, D.; Dann, L.; and Partch, M.. “Governance and Boards of Directors in Closed-End Investment Companies.” Journal of Financial Economics, 69 (2003), 111152.CrossRefGoogle Scholar
Demsetz, H. “The Structure of Ownership and the Theory of the Firm.” Journal of Law and Economics, 26 (1983), 375390.CrossRefGoogle Scholar
Elton, E.; Gruber, M.; and Blake, C.. “A First Look at the Accuracy of the CRSP Mutual Fund Database and a Comparison of the CRSP and Morningstar Mutual Fund Databases.” Journal of Finance, 56 (2001), 24152430.CrossRefGoogle Scholar
Elton, E.; Gruber, M.; Das, S.; and Hlavka, M.. “Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios.” Review of Financial Studies, 6 (1993), 122.CrossRefGoogle Scholar
Evans, R. “Does Alpha Really Matter? Evidence from Mutual Fund Incubation, Termination and Manager Change.” Working Paper, Boston College (2004).Google Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Bonds and Stocks.” Journal of Financial Economics, 33 (1993), 353.CrossRefGoogle Scholar
Gaspar, J. M.; Massa, M.; and Matos, P.. “Favoritism in Mutual Fund Families? Evidence on Strategic Cross-Fund Subsidization.” Journal of Finance, 61 (2006), 73104.CrossRefGoogle Scholar
Guedj, I., and Papastaikoudi, J.. “Can Mutual Fund Families Affect the Performance of Their Funds?” Working Paper, Massachusetts Institute of Technology (2004).CrossRefGoogle Scholar
Hermalin, B., and Weisbach, M.. “The Effects of Board Composition and Direct Incentives on Firm Performance.” Financial Management, 20 (1991), 101112.CrossRefGoogle Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48 (1993), 6591.CrossRefGoogle Scholar
Jensen, M. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance, 23 (1968), 389416.Google Scholar
Jensen, M., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305360.CrossRefGoogle Scholar
Khorana, A.; Servaes, H.; and Wedge, L.. “Portfolio Manager Ownership and Fund Performance.” Journal of Financial Economics, 85 (2007), 179204.CrossRefGoogle Scholar
Khorana, A.; Tufano, P.; and Wedge, L.. “Board Structure, Mergers and Shareholder Wealth: A Study of the Mutual Fund Industry.” Working Paper, Harvard University (2005).CrossRefGoogle Scholar
Klein, A. “Firm Performance and Board Committee Structure.” Journal of Law and Economics, 41 (1998), 275303.CrossRefGoogle Scholar
Mahoney, P. “Manager-Investor Conflicts in Mutual Funds.” Journal of Economic Perspectives, 18 (2004), 161182.CrossRefGoogle Scholar
Malkiel, B. “Returns from Investing in Equity Mutual Funds 1971 to 1991.” Journal of Finance, 53 (1995), 549572.CrossRefGoogle Scholar
McConnell, J., and Servaes, H.. “Additional Evidence on Equity Ownership and Corporate Value.” Journal of Financial Economics, 27 (1990). 595612.CrossRefGoogle Scholar
Meschke, F. “An Empirical Examination of Mutual Fund Boards.” Working Paper, Arizona State University (2005).Google Scholar
Morck, R.; Shleifer, A.; and Vishny, R.. “Management Ownership and Market Valuation: An Empirical Analysis.” Journal of Financial Economics, 20 (1988), 293315.CrossRefGoogle Scholar
Petersen, M. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Working Paper, Northwestern University (2007).CrossRefGoogle Scholar
Phillips, R. “Mutual Fund Independent Directors: A Model for Corporate America?Investment Company Institute Perspective, 9 (2003), 112.Google Scholar
Rogers, W. “Regression Standard Errors in Clustered Samples.” Stata Technical Bulletin, 13 (1993), 1923.Google Scholar
Securities and Exchange Commission. “Final Rule: Role of Independent Directors of Investment Companies.” Investment Company Act Release, No. 24816 (January 2, 2001) [66 FR 3734 (January 16, 2001)].Google Scholar
Tufano, P., and Sevick, M.. “Board Structure and Fee-Setting in the U.S. Mutual Fund Industry.” Journal of Financial Economics, 46 (1997), 321355.CrossRefGoogle Scholar
Weisbach, M. “Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431460.CrossRefGoogle Scholar
Wermers, R. “Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses.” Journal of Finance, 55 (2000), 16551695.CrossRefGoogle Scholar
Yermack, D. “Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185211.CrossRefGoogle Scholar
Zitzewitz, E. “Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds.” Journal of Law, Economics, and Organization, 19 (2003), 245280.CrossRefGoogle Scholar