Locating Decision Rights: Evidence from the Mutual Fund Industry

39 Pages Posted: 21 Mar 2006

See all articles by George D. Cashman

George D. Cashman

Marquette University; Texas Tech University

Daniel Deli

Securities and Exchange Commission (SEC)

Date Written: February 2006

Abstract

Mutual fund advisors make portfolio decisions for their funds on a daily basis. We examine the location of those portfolio decision rights on two dimensions. First, we consider the geographic location of the decision rights. Second, we consider whether the decision rights remain with an advisor or are outsourced to an independent sub-advisor. We argue that the allocation of portfolio decision rights involves a tradeoff between the opportunity cost of not matching decision rights with specific knowledge, and the agency costs associated with moving the decision rights to the specific knowledge. Patterns in the location of decision rights are consistent with that tradeoff being a meaningful determinant of the allocation of decision rights in the mutual fund industry. Additionally (and consistent with equilibrium), we find that risk-adjusted returns to sub-advised funds are greater than they would have been had the funds not been sub-advised, but indistinguishable from the returns produced by other funds.

Keywords: Mutual Funds, Decision Rights, Decentralization, Outsourcing

JEL Classification: G23, L14

Suggested Citation

Cashman, George D. and Deli, Daniel, Locating Decision Rights: Evidence from the Mutual Fund Industry (February 2006). Available at SSRN: https://ssrn.com/abstract=707863 or http://dx.doi.org/10.2139/ssrn.707863

George D. Cashman

Marquette University ( email )

College of Business Administration
P.O. Box 1881
Milwaukee, WI 53201-1881
United States
4142881448 (Phone)

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Daniel Deli (Contact Author)

Securities and Exchange Commission (SEC)

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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