Institutional theory of naive money

In the first chapter, I propose a theoretical framework to elucidate how capital from unsophisticated investors (naive money) is associated with fund performance dynamics. In the framework, when naive money invested in a fund exceeds the ideal amount for the manager's skill, it leads funds to under-perform persistently. In contrast, the model predicts that, when the amount of invested naive money is smaller than the ideal size of a fund reflecting the manager's skill, the fund performs the same as the market on a risk-adjusted basis. Empirical results using mutual fund data support this prediction. In the second chapter, I develop a model that characterizes how naive money influences the decisions of active mutual fund managers: in particular, managerial effort, fees, marketing expenses, private benefit-seeking, and risk-taking. My model predicts that managers who receive a surplus of naive money are inclined to reduce their managerial effort, charge higher fees, allocate more resources towards marketing, and pursue their private benefit by sacrificing returns to investors. In addition, it also predicts that a manager is most likely to increase idiosyncratic risk when the amount of invested naive money gets closer to a certain size of the fund that reflects the manager's skill. In the third chapter, I build a model to study how naive money affects funds' survivorship and entry decisions. Sufficient capital provision from unsophisticated investors elongates the survival of unskilled managers. Competition among funds determines the industry equilibrium, and the equilibrium is affected by several key market conditions: the aggregate investment opportunities, the aggregate capital inflows from unsophisticated investors, and the supply of skilled managers. When AM markets are heterogeneous in investor sophistication, the model shows, AM markets with more sophisticated investors (say, hedge fund markets) differentiate from those with less sophisticated investors (say, mutual fund markets). Skilled managers generate more value in hedge fund markets, and choose to enter those markets.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2018

Author dc:creator

• Kwak, Seung Ki

Advisor dc:contributor.advisor

• Leonid Kogan.

• Sloan School of Management.

Statement dc:rights

• MIT theses are protected by copyright. They may be viewed, downloaded, or printed from this source but further reproduction or distribution in any format is prohibited without written permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/120202

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/120202