Abstract: We address a methodological flaw in the influential Heath, Macciocchi, Michaely, and Ringgenberg (2022) paper. Corrected findings reveal that index inclusion and the resulting index ownership shifts do not affect a stock’s level of active fund ownership. Instead, index funds displace institutional owners with fewer assets and for which the stock represents a smaller portion of their assets. Additionally, there is no evidence that index funds monitor companies less than the owners they displace or that their growth negatively impacts firm performance and managerial incentives. These findings suggest that the impact of index investing is less concerning than earlier research indicated.
Discussant: Travis Johnson, University of Texas-Austin
Abstract: We examine the design of relative performance evaluation (RPE) in asset management using a unique international dataset of mutual funds with performance fees. Unlike traditional contracts, many of the fee structures in our sample require outperformance relative to risky benchmarks, allowing for a direct analysis of how RPE is implemented in practice. We quantify direct incentives through the option delta embedded in performance fees and indirect incentives via the present value of future fees generated by performance-sensitive investor flows. Relative performance fee (RPF) funds exhibit stronger direct incentives than their absolute performance fee (APF) counterparts, despite being benchmarked to higher risk-return profiles. However, their indirect incentives are proportionally weaker, resulting in a more short-term orientation of overall compensation. RPF fund contracts are rationally tailored to fund and investment-style characteristics in the cross-section. RPE is less prevalent among funds facing stronger market-based incentives through investor flows, offering novel evidence of within-fund substitution between incentive types. For RPF fund managers, talent translates to bargaining power for more favorable base compensation, not total lifetime pay. Our analysis offers insights into the likely (in)effectiveness of regulation across performance incentive schemes.
Discussant: Hong Yan, Shanghai Jiao Tong University
Abhinav Gupta, University of North Carolina-Chapel Hill
Sabrina Howell, New York University
Kyle Zimmerschied, University of Missouri
Abstract: Do private equity (PE) returns rise or fall with fund scale? A causal effect is difficult to identify because better managers can raise larger funds. We develop an instrument using donations to universities. Donations affect fund size because endowments are sensitive to donation income, have sticky relationships with PE managers, and signal fund quality to other Limited Partner investors. We show decreasing returns to scale: a 1\% size increase in fund size reduces net IRR by 0.1 percentage points. Larger funds do larger deals, which underperform. We find no change in risk, in part because additional deals are more levered.
Discussant: Ayako Yasuda, University of California-Davis
