Does skin in the game matter? Director incentives and governance in the mutual fund industry

M. Cremers, J.J.A.G. Driessen, P. Maenhout, D. Weinbaum

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or “skin in the game,” significantly underperform. We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism.
Original languageEnglish
Pages (from-to)1345-1373
JournalJournal of Financial and Quantitative Analysis
Volume44
Issue number6
Publication statusPublished - 2009

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Industry
Ownership
Governance
Incentives
Mutual funds
Equity
Incentive structure
Data base
Alignment
Economics
Fund performance
Private information
Shareholders

Cite this

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abstract = "We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or “skin in the game,” significantly underperform. We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism.",
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Does skin in the game matter? Director incentives and governance in the mutual fund industry. / Cremers, M.; Driessen, J.J.A.G.; Maenhout, P.; Weinbaum, D.

In: Journal of Financial and Quantitative Analysis, Vol. 44, No. 6, 2009, p. 1345-1373.

Research output: Contribution to journalArticleScientificpeer-review

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AU - Driessen, J.J.A.G.

AU - Maenhout, P.

AU - Weinbaum, D.

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N2 - We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or “skin in the game,” significantly underperform. We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism.

AB - We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or “skin in the game,” significantly underperform. We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism.

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JO - Journal of Financial and Quantitative Analysis

JF - Journal of Financial and Quantitative Analysis

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