Journal of Financial and Quantitative Analysis Vol. 59 No. 7 2024
Peer Versus Pure Benchmarks in the Compensation of Mutual Fund Managers
Abstract
We examine the role of peer (e.g., Lipper manager indices) versus pure (e.g., S&P 500) benchmarks in fund manager compensation. We model their impact on manager incentives and then test those predictions using novel data. We find that 71% of managers are compensated based on peer benchmarks. Consistent with the model, peer-benchmarked fund managers exhibit higher effort generating higher gross performance and collect higher fee income. Analyzing advisors’ choice between benchmark types, we show that peer-benchmarking advisors cater to more sophisticated and performance-sensitive investors, and are more likely to sell through direct channels, consistent with investor heterogeneity and market segmentation.
- DOI
- 10.1017/s0022109023001230
- Volume
- 59
- Issue
- 7
- Pages
- 3101-3138
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex