6 March 2019 – 0000
Career Risk and Market Discipline in Asset Management
We establish that the labor market helps discipline asset managers via the impact of fund liquidations on their careers. Using hand-collected data on 1,948 professionals, we -find that top managers working for funds liquidated after persistently poor relative performance suffer demotion coupled with a signi-ficant loss in imputed compensation. Scarring effects are absent when liquidations are preceded by normal relative performance or involve mid-level employees. Seen through the lens of a model with moral hazard and adverse selection, these scarring effects can be ascribed to a drop in asset managers’ reputation. The -findings suggest that performance-induced liquidations supplement compensation-based incentives.