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Journal of Financial Economics Vol. 73 No. 2 2004

Why constrain your mutual fund manager?

Andres Almazan; Keith C. Brown1; Murray Carlson2; David A. Chapman3

1 The University of Texas at Austin · 2 University of British Columbia · 3 Boston College

Abstract

We examine the form, adoption rates, and economic rationale for various mutual fund investment restrictions. A sample of U.S. domestic equity funds from 1994 to 2000 reveals systematic patterns in investment constraints, consistent with an optimal contracting equilibrium in the fund industry. Restrictions are more common when (i) boards contain a higher proportion of inside directors, (ii) the portfolio manager is more experienced, (iii) the fund is managed by a team rather than an individual, and (iv) the fund does not belong to a large organizational complex. Low- and high-constraint funds produce similar risk-adjusted returns, also consistent with an optimal contracting equilibrium.

DOI
10.1016/j.jfineco.2003.05.007
Volume
73
Issue
2
Pages
289-321
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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