【Abstract】

We study the effects of institutionalization on fund manager compensation and asset prices. Institutionalization raises the performance-sensitive component of the equilibrium contract, which makes institutional investors effectively more risk averse. Institutionalization affects market outcomes through two opposing effects. The direct effect is to bring in more informed capital, and the indirect effect is to make each institutional investor trade less aggressively on information through affecting the equilibrium contract. When there are many institutions and little noise trading in the market, the indirect contracting effect dominates the direct informed capital effect in determining market variables such as the cost of capital, return volatility, price volatility, and market liquidity. Otherwise, the direct informed capital effect dominates.

【Keywords】

Institutionalization; Delegation; Information acquisition; Agency problem; Asset prices

【Authors】

Huang Shiyang, Faculty of Business and Economics, The University of Hong Kong

Qiu Zhigang, Research Fellow of IMI, School of Finance, Renmin University of China

Yang Liyan, Rotman School of Management, University of Toronto; Johns Hopkins Carey Business School; School of Finance, Shanghai University of Finance and Economics