(Cambridge University Press, 2023-11-06) Evans, Richard; Ma, LinLin; Gómez, Juan Pedro; Tang, Yuehua; Ministerio de Economía y Competitividad; Agencia Estatal de Investigación; European Regional Development Fund; National Natural Science Foundation of China
; https://ror.org/02jjdwm75
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.
