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Journal of Finance Vol. 73 No. 4 2018

Efficiently Inefficient Markets for Assets and Asset Management

Nicolae Gârleanu1,2,3,4,5,6,7,8,9,10,11; Lasse Heje Pedersen12,11

1 Center for Economic and Policy Research · 2 Harvard University · 3 Queen Mary University of London · 4 Tinbergen Institute · 5 Air Liquide (United Kingdom) · 6 Toulouse School of Economics · 7 T1D Exchange · 8 Centro de Estudios Monetarios y Financieros · 9 Financial Management Association International · 10 New York University · 11 University of California, Berkeley · 12 Copenhagen Business School

open access

Abstract

We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily, more money is allocated to active management, fees are lower, and asset prices are more efficient. Informed managers outperform after fees, uninformed managers underperform, while the average manager's performance depends on the number of “noise allocators.” Small investors should remain uninformed, but large and sophisticated investors benefit from searching for informed active managers since their search cost is low relative to capital. Hence, managers with larger and more sophisticated investors are expected to outperform.

DOI
10.1111/jofi.12696
Volume
73
Issue
4
Pages
1663-1712
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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